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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 2)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24218
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4782077
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
135 North Los Robles Avenue, Suite 800, Pasadena, California 91101
(Address of principal executive offices including zip code)
(626) 792-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 28, 2002, there were 417.9 million shares of the registrant's
Common Stock outstanding. As of February 28, 2002, the aggregate market value
of Common Stock held by non-affiliates of the registrant was approximately $3.5
billion, based on the closing sale price of $18.29 per share as reported by the
Nasdaq National Market System. Shares of Common Stock held by officers,
directors, and 5% holders have been excluded from this calculation because such
persons may be deemed to be affiliates. The determination of affiliate status
is not a conclusive determination for other purposes.
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EXPLANATORY NOTE
This Amendment No. 2 to the Annual Report on Form 10-K/A ("Amendment No. 2")
for Gemstar-TV Guide International, Inc. (the "Company") for the fiscal year
ended December 31, 2001, is being filed to amend and restate the items
described below contained in the Company's Annual Report on Form 10-K
originally filed with the Securities and Exchange Commission ("SEC") on April
1, 2002, and as amended by Amendment No. 1 on Form 10-K/A ("Amendment No. 1")
originally filed with the SEC on April 30, 2002.
This Amendment No. 2 makes changes to Item 6, Selected Financial Data, Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 8, Financial Statements and Supplementary Data, and Item 14,
Exhibits, Financial Statement Schedules, and Reports on Form 8-K, for the
following purposes:
. To restate the Company's Consolidated Financial Statements as of December
31, 2001 and 2000 and for the year ended December 31, 2001, the nine
months ended December 31, 2000 and the year ended March 31, 2000, to
correct the accounting for the acquisition of certain intellectual
property acquired in 2001, to reverse revenue recognized under an expired
license agreement, to reclassify revenue among sectors recorded during
the third and fourth quarter of 2001, and to make certain other
adjustments, as more fully described in Note 2 to the Company's
Consolidated Financial Statements included in Item 8 (the "Unaudited
Consolidated Financial Statements"). The restated Unaudited Consolidated
Financial Statements included in this Amendment No. 2 have not been
audited or reviewed by an independent accounting firm and should not be
relied upon;
. To amend Item 6, Selected Financial Data, to take into account the
effects of the restatement;
. To amend Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, to take into account the effects of
the restatement; and
. To include in Note 16, information with respect to events that occurred
subsequent to the original filing of the Annual Report on Form 10-K,
including, but not limited to, a formal investigation of the Company by
the SEC and the potential delisting of the Company's securities from the
Nasdaq National Market.
This Amendment No. 2 also makes changes to Item 11, Executive Compensation,
to amend certain disclosures relating to the compensation of Dr. Henry C. Yuen,
which was originally included in Amendment No. 1.
In order to preserve the nature and character of the disclosures set forth
in such Items as originally filed, this Amendment No. 2 continues to speak as
of the date of the original filing of the Annual Report on Form 10-K on April
1, 2002, as amended by Amendment No. 1 and the Company has not updated the
disclosures in this report to speak as of a later date (except for Note 16 to
the Unaudited Consolidated Financial Statements with respect to subsequent
events through the date of this amendment). All information contained in this
Amendment No. 2 is subject to updating and supplementing as provided in the
Company's reports filed with the SEC, as amended, for periods subsequent to the
date of the original filing of the Annual Report on Form 10-K.
The Unaudited Consolidated Financial Statements included in this Amendment
No. 2 have not been audited or reviewed by an independent accounting firm and
should not be relied upon. Moreover, no independent auditors' report is
included for any of the Unaudited Consolidated Financial Statements herein.
Accordingly, the Unaudited Consolidated Financial Statements included in this
Amendment No. 2 are deficient and do not comply with the requirements of the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder. As a result, the Company's new Chief Executive Officer and Acting
Chief Financial Officer, who were appointed on November 7, 2002, are unable to
make the Certification required by Section 906 of the Sarbanes-Oxley Act.
2
The Company recently engaged a new independent accounting firm to audit the
Consolidated Financial Statements discussed in this Amendment No. 2.
Additionally, the Company will be reviewing its accounting policies to ensure
compliance with accounting principles generally accepted in the United States
of America. Specifically, the Company will be focusing on the accounting for
licensing and advertising revenue including but not limited to, revenues from
strategic customers and multi-platform advertisers. The Company intends to file
an additional amendment to its Annual Report on Form 10-K to include such
audited Consolidated Financial Statements and related independent auditors'
reports as promptly as practicable after its audit has been completed. However,
there can be no assurance as to when such audit will be completed. The Company
believes that it is likely that, as a result of such accounting firm's audit of
the Unaudited Consolidated Financial Statements and the Company's ongoing
review of its accounting policies and the application of the policies to
various types of transactions, the Company will further restate these Unaudited
Consolidated Financial Statements presented herein in an additional amendment
to the Annual Report on Form 10-K for the year ended December 31, 2001. Such
restatements may be material. Accordingly, the information presented in or
derived from the Unaudited Consolidated Financial Statements as contained in
this report should not be relied upon.
There are certain recent developments that have occurred between December
31, 2001 and the date of filing the Amendment No. 2 which could have a material
impact on the Company's business, results of operations and financial
condition, as described in Note 16, Subsequent Events, to the Unaudited
Consolidated Financial Statements included in Item 8 of this Amendment No. 2.
3
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
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PART II
ITEM 6. SELECTED FINANCIAL DATA.
The following information should be read in conjunction with the Unaudited
Consolidated Financial Statements and related Notes thereto, and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
selected financial data as of and for the year ended December 31, 2001, the
nine months ended December 31, 2000 and the year ended March 31, 2000 has been
restated, but has not been audited or reviewed by an independent auditor. For
additional information regarding the restatement, please refer to Note 2 to the
Unaudited Consolidated Financial Statements included in Item 8.
Unaudited
----------------------------------------------------
Restated
Restated Nine months Year ended March 31,
Year Ended ended --------------------------
December 31, December 31, Restated
2001(1) 2000(1) 2000(2) 1999(2) 1998(2)
------------ ------------ -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data:
Revenues................................................ $1,288,918 $ 694,610 $229,211 $168,166 $126,552
Operating expenses:
Operating expenses, excluding stock compensation,
depreciation and amortization, impairment of
goodwill and nonrecurring expenses................. 910,934 488,939 108,756 80,038 62,185
Stock compensation.................................. 44,729 18,294 -- -- --
Depreciation and amortization....................... 942,060 443,312 5,863 4,679 4,411
Impairment of goodwill.............................. 10,800 -- -- -- --
Nonrecurring expenses(3)............................ -- -- 15,895 1,851 11,713
---------- --------- -------- -------- --------
1,908,523 950,545 130,514 86,568 78,309
---------- --------- -------- -------- --------
Operating (loss) income................................. (619,605) (255,935) 98,697 81,598 48,243
Interest expense........................................ (27,298) (24,783) -- -- --
Other (expense) income, net............................. (119,126) 15,021 13,688 8,736 7,317
---------- --------- -------- -------- --------
(Loss) income before income taxes and extraordinary item (766,029) (265,697) 112,385 90,334 55,560
(Benefit) provision for income taxes.................... (132,471) (29,570) 38,778 30,189 20,433
---------- --------- -------- -------- --------
(Loss) income before extraordinary item................. (633,558) (236,127) 73,607 60,145 35,127
Extraordinary loss on debt extinguishment, net of tax... (2,100) -- -- -- --
---------- --------- -------- -------- --------
Net (loss) income....................................... $ (635,658) $(236,127) $ 73,607 $ 60,145 $ 35,127
========== ========= ======== ======== ========
(Loss) earnings per share(4):
Basic............................................... $ (1.54) $ (0.71) $ 0.36 $ 0.30 $ 0.18
Diluted............................................. $ (1.54) $ (0.71) $ 0.30 $ 0.26 $ 0.17
Weighted average shares outstanding(4):
Basic............................................... 412,389 334,804 205,635 198,568 193,020
Diluted............................................. 412,389 334,804 247,876 229,182 206,191
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The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
4
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
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Unaudited
-------------------------------------------------
December 31, March 31,
---------------------- --------------------------
2001(1) 2000(1) 2000
Restated Restated Restated 1999 1998
---------- ----------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Working capital........................................... $ 120,504 $ 337,450 $301,689 $190,296 $110,395
Total assets.............................................. 9,573,028 10,697,118 454,943 256,979 187,200
Long-term debt and capital lease obligations, less current
portion.................................................. 271,029 586,485 -- -- --
Total stockholders' equity................................ 7,490,100 8,025,240 377,947 185,160 103,630
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(1) Effective July 18, 2001 and July 12, 2000, the Company's consolidated
operating results include the operating results of SkyMall and TV Guide,
respectively. SkyMall and TV Guide were acquired in transactions accounted
for as purchases. Effective April 2001, the consolidated operating results
exclude the operating results of the business that distributes the WGN
superstation signal, which was sold.
(2) The Company completed mergers with NuvoMedia, Inc. ("NuvoMedia") and
SoftBook Press, Inc. ("SoftBook") in January 2000. Both mergers were
accounted for under the pooling of interests method and accordingly, the
Company's historical consolidated financial statements were restated for
all periods prior to January 2000 to include the accounts and results of
operations of NuvoMedia and SoftBook.
(3) Nonrecurring expenses for the years ended March 31, 2000 and 1998 consisted
of merger related costs incurred as a result of the mergers with NuvoMedia,
Inc. and SoftBook Press, Inc. in fiscal year 2000 and with StarSight
Telecast, Inc. in fiscal year 1998. Nonrecurring expenses for the year
ended March 31, 1999 consisted of costs incurred in defending the Company
against a hostile takeover.
(4) All share and per share data has been adjusted for the two-for-one stock
splits effected in May 1999 and December 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Unaudited Consolidated Financial Statements as of December 31, 2001 and
2000 and for the year ended December 31, 2001, the nine months ended December
31, 2000 and the year ended March 31, 2000 and the notes thereto included in
this Amendment No. 2 have been restated, but have not been reviewed or audited
by an independent accounting firm. For additional information regarding the
restatement, please refer to Note 2 to the Unaudited Consolidated Financial
Statements included in Item 8. All applicable financial information presented
in this Item 7 has been restated to take into account the effects of the
restatements described in Note 2 to the Unaudited Consolidated Financial
Statements. There can be no assurance that, at the conclusion of its audit, the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. As a result of
such accounting firm's audit and the Company's ongoing review of its accounting
policies, the Company may determine to restate the Unaudited Consolidated
Financial
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The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
5
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
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Statements contained herein. The Unaudited Consolidated Financial Statements
contained herein should not be relied upon.
On November 28, 2000, the Board of Directors of the Company approved a
change of the Company's fiscal year end from March 31 to December 31.
Accordingly, the financial statements of the Company present results of
operations and cash flows for the year ended December 31, 2001, the nine months
ended December 31, 2000 and the year ended March 31, 2000. To enhance
comparability, the following discussion of historical operating results
compares the twelve months ended December 31, 2001 to the same period in the
prior year as restated. Additionally, the following discussion of historical
operating results compares the nine-month period ended December 31, 2000 to the
same period in 1999.
In addition to the change in the Company's fiscal year end in 2000, the
Company completed several transactions during 2001 and 2000 that affect the
comparability of the results of operations.
. On July 12, 2000, the Company completed its merger with TV Guide. The
merger was accounted for as a purchase. Accordingly, the Unaudited
Consolidated Financial Statements include the results of operations of TV
Guide from July 12, 2000.
. In April 2001, the Company sold the business that distributes the WGN
superstation signal for approximately its net book value. Accordingly,
the Unaudited Consolidated Financial Statements do not include the
results of operations of WGN subsequent to that date. No gain or loss was
recognized as a result of this transaction.
. On July 18, 2001, the Company acquired 100% of the outstanding common
stock of SkyMall. The acquisition was accounted for as a purchase.
Accordingly, the Unaudited Consolidated Financial Statements include the
results of operations of SkyMall from July 18, 2001.
The Company also completed mergers with two electronic book companies,
NuvoMedia, Inc. ("NuvoMedia") and SoftBook Press, Inc. ("SoftBook") in January
2000. Both mergers were accounted for under the pooling of interests method
and, accordingly, the Company's historical consolidated financial statements
were restated for all periods prior to that date to include the results of
operations, financial position and cash flows of NuvoMedia and SoftBook.
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results
of operations are based upon our Unaudited Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of such financial
statements requires management to make estimates and assumptions in applying
certain critical accounting policies. Certain accounting estimates are
particularly sensitive because of their significance to our consolidated
financial statements and because of the possibility that future events
affecting the estimates could differ markedly from our
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The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
6
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
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current expectations. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
affect our financial statements.
Revenue Recognition--License Fees
We recognize revenues from per unit license fees based on units shipped
incorporating the Company's patented or proprietary technologies in the period
when the manufacturers' units shipped information is available to the Company.
Revenues from per subscriber fees from service providers are earned in the
month services are provided by a licensee using the Company's patented or
proprietary technologies. Revenues from annual and other license fees generally
are recognized based on the specific terms of the license agreements. From time
to time, the license agreement between the Company and a licensee may expire,
or for one reason or another, the licensee fails to remit license fees on a
timely basis, yet the same units continue to be shipped and the same services
continue to be deployed containing the Company's patented or proprietary
technologies. The Company looks to the four conditions under Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"), to
determine whether or not revenue should be recognized: whether there is
persuasive evidence that an arrangement exists, whether delivery has occurred
or service has been rendered, whether the price is fixed or determinable and
whether collection is reasonably assured. Additionally, the Company may
consider opinions of outside counsel when appropriate. These decisions involve
significant judgment by the Company.
Further discussion of the application of revenue recognition policies for
license fees is contained under the heading Technology and Licensing
Sector--Pro Forma.
Multi-Platform Advertising Sales
The Company believes that a potential competitive advantage in advertising
is the combined reach of its various advertising platforms--TV Guide Magazine
with a circulation of 9 million copies, IPG with a combined platform of more
than 15.0 million, TV Guide Channel with more than 50 million subscribers, and
tvguide.com with 4.0 million unique visitors per month, all targeted at
consumers who are interested in television guidance. In order to maximize the
effectiveness of such a competitive advantage, the Company offers customers the
opportunity to simultaneously advertise on two or more of its various delivery
platforms ("multi-platform" advertising). To encourage advertisers to increase
the amount of total advertising they purchase from the Company, in late 2001,
the Company established a Multi-Platform Advertising Program ("MPA Program") to
provide incentives in the form of discounts to advertisers who agree to use
multiple platforms. Often such discounts are significant, and frequently equal
and occasionally exceed the pre-discounted value of the advertising on the IPG
platform in the MPA Program.
In the third and fourth quarters of 2001, customers of the Company who had
committed to purchase advertising on Company platforms other than the IPG
(primarily the TV Guide Magazine) were offered an opportunity to advertise on
the IPG platform in amounts approximately equal in value with their existing
commitments to advertise on the print or channel platforms. Customers who
accepted this offer were charged for the
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The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
7
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
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IPG advertising and were provided with advertising of an approximate equal
value on the print or channel platforms at no additional cost. All of the
revenue associated with these transactions was recorded as IPG revenue.
In the fourth quarter of 2001, the Securities and Exchange Commission
provided additional guidance regarding multiple-element transactions in SAB
101, Frequently Asked Questions and Answers, Question 4. This guidance directed
that revenue in multiple-element transactions should be allocated based upon
the relative fair value of the elements involved in the transaction, provided
that each element represents a separate earnings process. The Company's
decision to reclassify $2.7 million in advertising revenue in conjunction with
the restatement of the Unaudited Consolidated Financial Statements included
herein (see Note 2 to the Unaudited Consolidated Financial Statements) applies
this guidance, in that the $5.5 million in total advertising value provided to
multi-platform purchasers during the third and fourth quarters of 2001 was
evenly split between IPG and print advertising. The Company, in consultation
with its recently engaged independent accounting firm, is continuing to review
the applicability of the referenced guidance to the multi-platform advertising
transactions and, as a result, may determine that additional revenue should be
reclassified from the Interactive Platform Sector to the Media and Services
Sector.
Patent Prosecution and Litigation Costs
The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect and enforce the Company's intellectual
property rights is to defer such costs as intangible assets and to amortize
them using the straight-line method over the remaining lives of the related
patents. The Company reviews its characterization of patent prosecution and
litigation costs whenever events or changes in circumstances, such as adverse
administrative or judicial rulings, indicate that certain deferred costs should
be expensed. The propriety of such characterizations is determined by
management based, in part, on the advice of outside counsel.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to the undiscounted future operating cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
The Company has a significant amount of property and equipment and
intangible assets. The determination as to whether events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable involves management's judgment. In addition, should the Company
conclude that recoverability of an asset is in question, the estimate of
undiscounted future operating cash flows to determine whether an asset is
recoverable and, if not, the final determination of the fair value of the asset
are also based on the judgment of management. These
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The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
8
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
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judgments can be impacted by a variety of underlying assumptions, such as the
general business climate, effectiveness of competition and supply and cost of
resources. Accordingly, actual results can differ significantly from the
assumptions made by management in making its estimates. Future changes in
management's estimates could result in indicators of impairment and actual
impairment charges where none exist today.
New accounting standards effective January 1, 2002, eliminate the impairment
recoverability tests for goodwill and certain other intangible assets with
indefinite lives and require that such assets be valued at the lower of their
carrying value or fair value. The Company expects to report transitional
impairment losses of up to $5 billion in the first quarter of 2002 upon
adoption of these new standards. Significant management judgment is involved in
determining the fair value of assets. Accordingly, future changes in
management's estimates could result in further impairment charges of goodwill
and indefinite lived intangible assets.
Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company records a valuation allowance, if necessary, to
reduce deferred tax assets to an amount management believes is more likely than
not to be realized.
The Company has income both from foreign and domestic sources. In the
preparation of our financial statements, we are required to estimate our income
taxes in each of the jurisdictions in which we operate, including estimating
both our actual current tax exposure and assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
Assessment of our actual current tax exposure includes assessing tax
strategies, the status of tax audits and open audit periods with the taxing
authorities. To the extent that we have deferred tax assets, we must assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent that we believe that recovery is not likely, we must
establish a valuation allowance. As of December 31, 2001, we have established a
valuation allowance of $65.5 million against our deferred tax assets. In the
future, we may adjust our estimates of the amount of valuation allowance needed
and such adjustment would impact our provision for income taxes in the period
of such change.
Allowance for Doubtful Accounts
We have significant amounts due to us from our customers. We continuously
evaluate our outstanding accounts receivable for collectibility. This
evaluation involves management's judgment in assessing the aging of the amounts
due to us and in reviewing the credit-worthiness of each customer. Should a
customer's financial condition deteriorate in a manner that could decrease the
customer's ability to pay amounts due to us, we might be required to provide
additional allowance for doubtful accounts which would reduce our earnings.
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The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
9
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
The following table sets forth certain financial information for the Company
during the year ended December 31, 2001, the nine months ended December 31,
2000 and the year ended March 31, 2000. To enhance comparability, the following
table also includes certain financial information for the Company for the year
ended December 31, 2000 and the nine months ended December 31, 1999.
Unaudited
- - ----------------------------------------------------
Restated Nine Months Ended Restated
Year Ended December 31, December 31, Year
--------------------- ------------------- Ended
Restated March 31,
2001(1) 2000(4) 2000(1)(2) 1999(5) 2000
---------- --------- ---------- -------- ---------
(in thousands)
Statement of Operations Data:
Revenues......................................... $1,288,918 $ 766,375 $ 694,610 $157,446 $229,211
Operating expenses:
Operating expenses, excluding stock
compensation, depreciation and
amortization, impairment of goodwill and
nonrecurring expenses....................... 910,934 515,967 488,939 81,728 108,756
Stock compensation............................ 44,729 18,294 18,294 -- --
Depreciation and amortization................. 942,060 444,904 443,312 4,271 5,863
Impairment of goodwill........................ 10,800 -- -- -- --
Nonrecurring expenses......................... -- 15,895 -- -- 15,895
---------- --------- --------- -------- --------
1,908,523 995,060 950,545 85,999 130,514
---------- --------- --------- -------- --------
Operating (loss) income.......................... (619,605) (228,685) (255,935) 71,447 98,697
Interest expense................................. (27,298) (24,783) (24,783) -- --
Other (expense) income, net...................... (119,126) 18,861 15,021 9,848 13,688
---------- --------- --------- -------- --------
(Loss) income before income taxes and
extraordinary item............................. (766,029) (234,607) (265,697) 81,295 112,385
(Benefit) provision for income taxes............. (132,471) (18,101) (29,570) 27,309 38,778
---------- --------- --------- -------- --------
(Loss) income before extraordinary item.......... (633,558) (216,506) (236,127) 53,986 73,607
Extraordinary loss on debt extinguishment, net of
tax............................................ (2,100) -- -- -- --
---------- --------- --------- -------- --------
Net (loss) income................................ $ (635,658) $(216,506) $(236,127) $ 53,986 $ 73,607
========== ========= ========= ======== ========
Other Financial Data:
Net cash provided by (used in):
Operating activities.......................... $ 186,483 $ 317,898 $ 312,492 $ 59,800 $ 65,206
Investing activities.......................... 4,001 (21,691) (36,724) (77,486) (62,453)
Financing activities.......................... (328,958) (20,531) (24,552) 46,536 50,557
EBITDA(3)........................................ 377,984 250,408 205,671 75,718 120,455
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
10
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
- --------
(1) Effective July 18, 2001 and July 12, 2000, the Company's consolidated
operating results include the operating results of SkyMall and TV Guide,
respectively. SkyMall and TV Guide were acquired in transactions accounted
for as purchases. Effective April 2001, the consolidated operating results
exclude the operating results of the business that distributes the WGN
superstation signal, which was sold.
(2) On November 28, 2000, the Board of Directors of the Company approved the
change of the Company's fiscal year end from March 31 to December 31.
(3) EBITDA means operating income before noncash stock compensation expense,
depreciation and amortization, impairment of goodwill and nonrecurring
expenses, which consist of merger related costs incurred as a result of the
mergers with NuvoMedia, Inc. and SoftBook Press, Inc. in fiscal year 2000.
Due to purchase accounting related to the Company's merger with TV Guide on
July 12, 2000, the results of operations for the year ended December 31,
2001 and the nine months ended December 31, 2000, reflect significant
increases in depreciation and amortization of goodwill and other intangible
assets. Accordingly, the Company's business sectors are measured based on
EBITDA. EBITDA is presented supplementally as the Company believes it is a
standard measure commonly reported and widely used by analysts, investors
and others associated with its industry. However, EBITDA does not take into
account substantial costs of doing business, such as income taxes and
interest expense. While many in the financial community consider EBITDA to
be an important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for, operating income,
net income, cash flow provided by operating activities and other measures
of financial performance prepared in accordance with accounting principles
generally accepted in the United States of America that are presented in
the financial statements included in this report. Additionally, the
Company's calculation of EBITDA may be different than the calculation used
by other companies and, therefore, comparability may be affected.
(4) Reported results for the transition period from April 1, 2000 to December
31, 2000 have been combined with operating results for the three months
ended March 31, 2000 to enhance comparability.
(5) Operating results for the three months ended March 31, 2000 have been
deducted from reported results for the year ended March 31, 2000 to present
amounts for the nine months ended December 31, 1999.
Results of Operations
Consolidated
Year ended December 31, 2001 compared to the year ended December 31, 2000
Revenues for the year ended December 31, 2001 were $1.3 billion, an increase
of $522.5 million compared to the same period in 2000. The increase in revenues
was primarily due to $479.5 million of additional revenues attributable to TV
Guide, which was acquired by the Company on July 12, 2000 and an increase of
$20.7 million in advertising on the Company's proprietary platforms (excluding
the TV Guide platforms).
The Company's advertising revenues for the year ended December 31, 2001
aggregated $277.7 million. The general weakness in the advertising market
during 2001 impacted most media companies in the United States,
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
11
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
including the Company. As the Company's IPG platform is a new medium
experiencing rapid growth rather than operating at a relatively static level of
subscribers, the impacts of the weak advertising market were not as pronounced
on the IPG platform as the impacts on the Company's conventional media
properties. Management believes that with the tragedy of September 11, 2001,
and the resulting weakness in the U.S. economy, unless there is a strong
recovery in 2002 in the advertising industry, the Company may experience
considerable pressure on its advertising revenues both from its conventional
media and its growing IPG platform. For additional discussion of advertising
revenues, see the Company's discussion of pro forma sector operating results
below.
Operating expenses, excluding stock compensation, depreciation and
amortization, impairment of goodwill and nonrecurring expenses were $910.9
million for the year ended December 31, 2001, an increase of $395.0 million
when compared to the same period in 2000. The increase in operating expenses
was primarily due to increased operating costs of $356.0 million attributable
to a full year of TV Guide operations coupled with increased costs to operate
the advertising enabled IPG platform.
Stock compensation expense reflects amortization of the portion of the
purchase price of TV Guide assigned to unearned compensation for unvested TV
Guide stock options assumed by the Company in the TV Guide transaction. The
unearned compensation is being amortized over the remaining vesting period of
the options. No similar amortization expense existed in periods prior to the
acquisition of TV Guide. During the fourth quarter of 2001, stock compensation
expense included $14.8 million of additional unearned compensation amortization
resulting from a senior executive officer that separated from the Company.
Depreciation and amortization during the year was $942.1 million, an
increase of $497.2 million compared to the same period in 2000. The increase in
depreciation and amortization was attributable to a full year of amortization
of intangible assets and other depreciation resulting from the acquisition of
TV Guide. Effective January 1, 2002, the Company is required to adopt the
provisions of Financial Accounting Standards Board Statement No. 142, Goodwill
and Other Intangible Assets. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. As of December 31, 2001, the Company has
unamortized goodwill in the amount of $5.6 billion and unamortized identifiable
intangible assets in the amount of approximately $888 million, which will no
longer be subject to amortization under the provisions of Statement 142.
Amortization expense related to such assets was $486.4 million and $231.4
million for the years ended December 31, 2001 and 2000, respectively. The
Company is currently in the process of evaluating the impacts of adopting
Statement 142 on its financial statements. Based on the Company's analysis
completed to date, the Company expects to report transitional impairment losses
of up to $5 billion upon adoption of Statement 142 in the first quarter of
2002. Pursuant to the provisions of Statement 142, these transitional
impairment losses will be reported as a cumulative effect of a change in
accounting principle.
The Company had impairment of goodwill relating to its acquisition of Les
Editions 00h00, an electronic publisher in Europe, of $10.8 million during the
year. No similar impairment charges were recorded in prior years.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
12
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Interest expense was $27.3 million for the year ended December 31, 2001
compared to $24.8 million for the same period in 2000. The increase in interest
expense was attributable to the debt and capital lease obligations assumed in
the TV Guide transaction being outstanding for a full year in 2001, offset by
lower debt levels and interest rates. Prior to the acquisition of TV Guide, the
Company had no debt.
Other income (expense), net was $(119.1) million for the year ended December
31, 2001 compared to $18.9 million for the same period in 2000. The decrease in
other income (expense), net was due primarily to a $109.1 million write-down
($98.3 million during the fourth quarter) in 2001 of certain of the Company's
technology investments and marketable securities, many of which were acquired
as part of the TV Guide merger and were recorded at values that existed for
technology investments at that time, coupled with lower rates of return on cash
investments during 2001 compared to 2000. During the fourth quarter, management
concluded that the general weakness in the economy had impacted the fair value
of these investments in a manner which was other than temporary, by delaying
the deployment of underlying technologies, making it difficult for development
stage companies to access capital, and by causing sustained periods of
depressed stock prices from previous prices.
The provision for income tax benefit as a percentage of loss before income
taxes and extraordinary item was 17% for the year ended December 31, 2001
compared to 8% for the same period in 2000. The increase in the effective tax
rate is primarily due to the 2001 operating results including amortization of
non-deductible goodwill recorded as a part of the TV Guide acquisition for the
full year while 2000 operating results only contained such amortization for the
period subsequent to July 12, 2000. In addition, the overall effective tax rate
reported by the Company in any single period is impacted by, among other
things, the country in which earnings or losses arise, applicable statutory tax
rates and withholding tax requirements for particular countries, the
availability of net operating loss carryforwards and the availability of tax
credits for taxes paid in certain jurisdictions. Because of these factors, it
is expected that the Company's future tax expense as a percentage of income
before income taxes may vary from year to year.
Nine months ended December 31, 2000 compared to nine months ended December 31,
1999
Revenues for the nine months ended December 31, 2000 were $694.6 million, an
increase of $537.2 million compared to the same period in 1999. The increase in
revenues was primarily due to $527.0 million of additional revenues
attributable to the TV Guide acquisition on July 12, 2000. The remainder of the
increase in revenues was attributable to an increase in worldwide licensing
income derived from the Company's proprietary technologies and intellectual
property associated principally with IPGs and an increase in advertising on the
Company's proprietary platforms. The Company commenced selling advertising on
the IPG platform in 1999.
Operating expenses, excluding stock compensation, depreciation and
amortization, impairment of goodwill and nonrecurring expenses, were $488.9
million for the nine months ended December 31, 2000, an increase of $407.2
million when compared to the same period in 1999. The increase in operating
expenses was primarily due to increased operating costs of $399.6 million
attributable to TV Guide coupled with increased costs to operate the
advertising enabled IPG platform.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
13
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Stock compensation expense reflects amortization of the portion of the
purchase price of TV Guide assigned to unearned compensation expense for
unvested TV Guide stock options assumed by the Company in the TV Guide
transaction. No similar amortization expense existed in periods prior to the
acquisition of TV Guide.
Depreciation and amortization during the nine-month period ended December
31, 2000 was $443.3 million, an increase of $439.0 million compared to the same
period in 1999. The increase in depreciation and amortization was a result of
amortization of goodwill and other intangible assets and other depreciation
resulting from the acquisition of TV Guide.
Interest expense was $24.8 million for the nine months ended December 31,
2000 compared to none for the same period in 1999. The increase in interest
expense was attributable to the assumption of debt and capital lease
obligations in the TV Guide transaction. Prior to the acquisition of TV Guide,
the Company had no debt.
Other income, net was $15.0 million for the nine months ended December 31,
2000 compared to $9.8 million for the same period in 1999. The increase in
other income, net was due primarily to higher invested cash balances coupled
with higher rates of return in 2000 compared to 1999.
The provision for income tax benefit as a percentage of loss before income
taxes was 11% for the nine-month period ended 2000 compared to the provision
for income tax expense as a percentage of income before income taxes of 34% for
the same period in 1999. The 11% effective tax rate in 2000 is primarily due to
the 2000 operating results including amortization of non-deductible goodwill
recorded as a part of the TV Guide acquisition. In addition, the overall
effective tax rate reported by the Company in any single period is impacted by,
among other things, the country in which earnings or losses arise, applicable
statutory tax rates and withholding tax requirements for particular countries,
the availability of net operating loss carryforwards and the availability of
tax credits for taxes paid in certain jurisdictions. Because of these factors,
it is expected that the Company's future provision for income taxes as a
percentage of income before income taxes may vary from year to year.
Pro Forma Sector Results of Operations
To enhance comparability, the following table sets forth certain financial
information for the Company's business sectors on an unaudited pro forma basis
for the twelve months ended December 31, 2001 compared to the twelve months
ended December 31, 2000. This pro forma financial information reflects the
merger with TV Guide, the acquisition of SkyMall and sale of WGN as though they
had occurred on January 1, 2000. Due to purchase accounting, the results of
operations for the year ended December 31, 2001 and for the nine-month period
ended December 31, 2000, reflect significant increases in amortization of
goodwill and other intangible assets. Accordingly, the Company's business
sectors are measured based on EBITDA (operating income before stock
compensation expense, depreciation and amortization, impairment of goodwill and
nonrecurring expenses). The Company believes pro forma results represent an
appropriate supplemental analysis of revenues, expenses and EBITDA trends, as
the pro forma presentation includes the results of operations of the Company's
significant businesses for all periods presented.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
14
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
The Company categorizes its businesses into three groups which also
represent its reportable business segments: the Technology and Licensing
Sector, which is responsible for the development, licensing and protection of
intellectual property and proprietary technologies (the Company's technology
includes the IPGs marketed under the GUIDE Plus+ and TV Guide Interactive
brands, the VCR Plus+ system and the eBook); the Interactive Platform Sector,
which derives recurring income from advertising, interactive services and
e-commerce on the Company's proprietary interactive platforms; and the Media
and Services Sector, which operates TV Guide Magazine, TV Guide Channel, TVG,
Skymall catalog sales, SNG and other non-interactive platforms and media
properties. The Company's business sectors represent strategic business units
that offer different products and services and compete in different industries.
Restated
Unaudited Pro Forma
Year Ended December 31,
----------------------
2001 2000
---------- ----------
(in thousands)
Technology and Licensing Sector
Revenues...................... $ 267,727 $ 231,802
Operating expenses(1)......... 97,781 90,563
---------- ----------
EBITDA(2)..................... $ 169,946 $ 141,239
========== ==========
Interactive Platform Sector
Revenues...................... $ 78,704 $ 23,119
Operating expenses(1)......... 120,368 72,128
---------- ----------
EBITDA(2)..................... $ (41,664) $ (49,009)
========== ==========
Media and Services Sector
Revenues...................... $ 968,511 $1,136,986
Operating expenses(1)......... 726,693 887,188
---------- ----------
EBITDA(2)..................... $ 241,818 $ 249,798
========== ==========
Consolidated (after eliminations)
Revenues(3)................... $1,304,977 $1,390,916
Operating expenses(1)(3)...... 934,877 1,048,888
---------- ----------
EBITDA(2)..................... $ 370,100 $ 342,028
========== ==========
- --------
(1) Expenses means operating expenses, excluding stock compensation,
depreciation and amortization, impairment of goodwill and nonrecurring
expenses.
(2) EBITDA means operating income before noncash stock compensation expense,
depreciation and amortization, impairment of goodwill and nonrecurring
expenses, which consist of merger related costs incurred as a result of the
mergers with NuvoMedia, Inc. and SoftBook Press, Inc. in fiscal year 2000.
Due to purchase accounting related to the Company's merger with TV Guide on
July 12, 2000, the results of operations for the year ended December 31,
2001 and the nine months ended December 31, 2000, reflect significant
increases in depreciation and amortization of goodwill and other intangible
assets. Accordingly,
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
15
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
the Company's business sectors are measured based on EBITDA. EBITDA is
presented supplementally as the Company believes it is a standard measure
commonly reported and widely used by analysts, investors and others
associated with its industry. However, EBITDA does not take into account
substantial costs of doing business, such as income taxes and interest
expense. While many in the financial community consider EBITDA to be an
important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for, operating income,
net income, cash flow provided by operating activities and other measures of
financial performance prepared in accordance with accounting principles
generally accepted in the United States of America that are presented in the
financial statements included in this report. Additionally, the Company's
calculation of EBITDA may be different than the calculation used by other
companies and, therefore, comparability may be affected.
(3) Inter-segment eliminations consist of media and sales commissions reported
as revenues by the Media and Services Sector and expenses by the
Interactive Program Sector.
The following discussion of each of the Company's segments is based on the
unaudited pro forma financial information provided above.
Technology and Licensing Sector--Pro Forma
The Technology and Licensing Sector is responsible for the development,
licensing and protection of intellectual property and proprietary technologies.
Revenues in this Sector are comprised of license fees paid by third-party
licensees for the Company's proprietary technologies and patents primarily
related to IPGs, video recording and electronic books. The Company's licensing
activities cover multiple industries including consumer electronics, cable,
satellite, Internet appliances, personal computers, and publications worldwide,
with major licensees such as Microsoft, AOL/Time Warner, Motorola, AT&T,
Charter Communications, Comcast, Shaw, Thomson multimedia, Sony, Matsushita
(Panasonic) and others. Sector operations include research and development, and
the creation, protection and licensing of patents and proprietary technologies.
For the twelve months ended December 31, 2001, pro forma revenues for the
Technology and Licensing Sector were $267.7 million compared to $231.8 million
in the prior year. The increase in revenues for this sector of $35.9 million,
or 15%, was attributable to growth in worldwide licensing income derived from
the Company's proprietary technologies and intellectual property associated
primarily with IPGs. During 2001, the Company entered into agreements with new
licensees for its technologies and increased the distribution base for its
proprietary IPG platforms marketed under the GUIDE Plus+ and TV Guide
Interactive brands.
The Company's accounting policy related to recognition of licensing revenues
provides that revenues from per unit license fees are recognized based on units
shipped incorporating the Company's patented or proprietary technologies in the
period when the manufacturers' units shipped information is available to the
Company. Revenues from per subscriber fees from service providers are earned in
the month services are provided by a licensee using the Company's patented or
proprietary technologies. Revenues from annual and other license fees generally
are recognized based on the specific terms of the license agreements. From time
to time, the license agreement between the Company
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
16
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
and a licensee may expire, or for one reason or another, the licensee fails to
remit license fees on a timely basis, yet the same units continue to be shipped
and the same services continue to be deployed containing the Company's patented
or proprietary technologies. The Company looks to the four conditions under SAB
101, to determine whether or not revenue should be recognized: whether there is
persuasive evidence that an arrangement exists, whether delivery has occurred
or service has been rendered, whether the price is fixed or determinable and
whether collection is reasonably assured. Additionally, the Company may
consider opinions of outside counsel when appropriate. These decisions involve
significant judgment by the Company.
In the cable and satellite sectors, the Company has adopted a policy that
the on-going per subscriber license fees charged to MSOs would include the cost
of licenses otherwise required of manufacturers for incorporating the Company's
technologies into set-top boxes shipped to the licensed MSO. For this reason,
as more and more direct agreements are concluded with MSOs for the Company's
IPG technologies and services, the on-going per subscriber revenues will
increase, while the per unit license fees from set-top box suppliers are
expected to decrease.
In 1998, the Company entered into a license agreement with America Online
("AOL"), predecessor of AOL Time Warner. Following the acquisition of Time
Warner by AOL in January 2001, the Company informed AOL Time Warner that the
Company believed the AOL agreement applied to Time Warner cable subscribers
based on language in the agreement which required AOL to use its best efforts
to extend the agreement to AOL affiliates. AOL Time Warner responded that the
agreement did not apply to Time Warner cable subscribers for several specified
reasons. After meeting with AOL Time Warner in the second quarter of 2001 and
based on the status of negotiations to extend the agreement to Time Warner
cable subscribers, the Company concluded that the AOL agreement applied to Time
Warner Cable subscribers and recorded revenues based on the agreement starting
with the third quarter of 2001. The total receivable from AOL Time Warner under
this license agreement at December 31, 2001 is $11.3 million. The Company
continues to believe that the outstanding receivable from AOL Time Warner is
collectible.
In October 2000, the Company received $188.0 million in cash from a set-top
box manufacturer to settle outstanding arbitration and litigation proceedings.
Of the $188.0 million cash received approximately $120.0 million was in
prepayment of a 10-year technology licensing agreement. This prepayment is
being amortized into income based on the number of set-top boxes that such
manufacturer ships, with a differentiation made for shipments to MSO's having
licensing agreements with the Company and uncontracted MSO's. Revenues in the
Technology and Licensing Sector for the years ended December 31, 2001 and 2000
include $51.2 million and $34.8 million, respectively, recognized in connection
with this agreement. At December 31, 2001, $66.5 million remained to be
recognized over the remaining term of the agreement.
Per unit license fees from cable and satellite set-top box suppliers were
$95.9 million and $101.5 million in 2001 and 2000, respectively. Due to the
fact that the Company entered into a large number of license agreements with
cable MSOs in 2001, per unit license fees from set-top box suppliers are
expected to decrease significantly in 2002, offset in part by increases in the
on-going per subscriber license fees earned from cable MSOs.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
17
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Pro forma expenses in this sector for the twelve months ended December 31,
2001 were $97.8 million compared to $90.6 million in 2000. The increase in
expenses is attributable to increased research and development costs associated
primarily with incorporating advertising features in the IPGs.
Interactive Platform Sector--Pro Forma
The Interactive Platform Sector derives recurring revenues from advertising,
interactive services and e-commerce on the Company's proprietary interactive
platforms, and through revenue sharing under license agreements. Sector
activities include the construction and operation of the infrastructure for the
delivery of services and advertising to the interactive platforms, media
research, and trafficking, tracking and billing of advertising. The Company's
rapidly growing IPG platform currently is comprised of television sets
incorporating the Gemstar GUIDE Plus+ IPG and digital cable set-top boxes
incorporating the TV Guide Interactive and StarSight(R) IPGs.
The most significant source of revenues in this sector is advertising on the
IPG. Such advertising is generated in three different ways: strategic
advertising commitments, the multi-platform sales program and sales to other
advertisers who may or may not advertise on the Company's other advertising
platforms ("Stand-Alone Advertisers"). A summary of the IPG advertising
revenues from each of these initiatives is as follows (in thousands):
Year ended Year ended
December 31, December 31,
2001 2000
------------ ------------
Strategic Advertisers..... $38,451 $ 4,926
Multi-Platform Advertisers 2,769 --
Stand-Alone Advertisers... 12,313 6,445
------- -------
Total..................... $53,533 $11,371
======= =======
Strategic advertising revenues are primarily derived from long-term
commitments from three significant customers. In April 2001, the Company
secured a long term commitment in conjunction with the sale of the WGN
Superstation distribution business. The commitment is for $100 million over six
years for advertising on the Company's platforms. IPG advertising revenues
recognized from this contract in the year ended December 31, 2001 were
$12.0 million.
The second significant strategic advertising commitment is from Thomson
multimedia, Inc. ("Thomson"), a consumer electronics manufacturer with which
the Company has multiple licensing and advertising transactions. Among the
transactions between the two companies, Thomson licenses the Company's VCR
Plus+, GUIDE Plus+ and eBook technologies, advertises on the Company's
platforms, primarily the interactive program guide platforms, and participates
with the Company in marketing and promoting Thomson products carrying the
Company's technology. In addition, the two companies are joint venture partners
in the sale of advertising and electronic program guides on televisions. IPG
advertising revenues recognized from this commitment for the years ended
December 31, 2001 and 2000 were $10.1 million and $2.0 million, respectively.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
18
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
The third strategic advertising commitment is from a set-top box
manufacturer as part of a long-term licensing and settlement agreement. This
manufacturer prepaid $17.5 million in IPG advertising which was recognized as
revenue over an 18 month period, ending in March 2002, as the advertising was
aired. IPG advertising revenues recognized from this commitment for the year
ended December 31, 2001 were $14.4 million. There were no revenues recognized
from this commitment in the year ended December 31, 2000.
In an effort to attract customers to simultaneously advertise on two or more
of its various delivery platforms, in late 2001, the Company established the
MPA Program to provide incentives in the form of discounts for multi-platform
advertisers. Often such discounts are significant, and frequently equal and
occasionally exceed the pre-discounted value of the advertising on the IPG
platforms. See Critical Accounting Policies and Estimates--Multi-Platform
Advertising Sales. Revenues are allocated among the sectors based on the
relative fair value of the advertising inventory, as measured by the
advertiser-specific rates or market rates of similar advertisers for each
medium. The IPG platform is frequently involved in sales under the MPA Program.
The Interactive Platform Sector includes $2.8 million in revenue from the MPA
program for the year ended December 31, 2001.
For the twelve months ended December 31, 2001, pro forma revenues for the
Interactive Platform Sector were $78.7 million compared to $23.1 million for
the prior year, an increase of 240%. Currently, revenues in this sector are
comprised primarily of advertising revenues earned on the Company's proprietary
platforms, including the IPGs and the online web site, www.tvguide.com. The
Company first commenced selling advertising on the IPG platform in 1999. The
increase in revenues of this sector of $55.6 million is primarily attributable
to the launch of advertising enabled IPGs under the TV Guide Interactive brand
during 2000 coupled with the increased penetration of such guides into the
market place.
The Company has relationships with licensees, vendors and strategic
partners, many of which also purchase advertising on the Company's properties,
including those in the Interactive Platform Sector. For instance,
Superstar/Netlink Group acquires programming for its subscribers from the
majority of programmers in the United States, many of which purchase
advertising on the Company's properties. The Company believes that these
transactions are not related and have been entered into in a manner such that
the goods or services acquired are acquired at fair value and the advertising
is sold at fair value. During 2001, a significant amount of the cash
advertising revenues in the interactive platform sector was derived from
accounts in which varying degrees of such relationships existed. The Company
intends to continue to maximize its relationships with licensees, vendors and
strategic partners to obtain advertising on its IPG platform. The Company has
generally sold most of its advertising time for cash and intends to continue
this practice into the future.
Pro forma expenses for this sector were $120.4 million for the year ended
December 31, 2001 compared to $72.1 million for 2000, an increase of 67%. The
increase in expenses of $48.2 million is primarily attributable to costs
incurred to operate the expanding IPG base, including the new advertising
enabled versions of the IPGs, coupled with advertising and promotion expenses
incurred to promote the penetration of digital cable television into the market
and the Company's IPGs. The Company has entered into certain long-term
agreements with MSOs to advertise and promote the penetration of Company
products, including TV Guide Interactive. The Company benefits with accelerated
consumer penetration of digital cable featuring TV Guide Interactive.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
19
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Media and Services Sector--Pro Forma
The Media and Services Sector operates TV Guide Magazine, TV Guide Channel,
TVG, SkyMall catalog sales, SNG and other non-interactive platforms and media
properties. Revenues in this sector are principally composed of subscription
fees and advertising revenues of the TV Guide magazines and the TV Guide
Channel and programming package revenues from C-band households. The Company
sold the business that distributes the WGN superstation signal in April 2001
for approximately its net book value and acquired SkyMall in July 2001.
Accordingly, pro forma amounts for this sector which were previously presented
have been restated for the impacts of the WGN superstation disposition and
SkyMall acquisition. The Company is also currently in active negotiations for
the sale of the remaining distant signal superstation business.
For the twelve months ended December 31, 2001, pro forma revenues for the
Media and Services Sector were $968.5 million compared to $1.1 billion for the
prior year. Revenues in this sector decreased by $168.5 million, primarily due
to decreased revenues earned by TV Guide Magazine and SNG. TV Guide Magazine
continues to face declines in circulation due to slower new subscriber growth,
lower renewal rates and reduced newsstand sales, which have been significant
subsequent to the events of September 11, 2001. At December 31, 2001, TV Guide
Magazine had a circulation of 9.0 million compared to 9.9 million at December
31, 2000. The C-band direct-to-home satellite market, in which SNG operates,
continues to decline due to the growth of the newer generation direct broadcast
satellite systems and continued cable system expansions. During the year ended
December 31, 2001, the number of C-band subscribers in the industry decreased
by 31% to approximately 823,000 subscribers. At December 31, 2001, SNG provided
service to 549,000 of these subscribers, a decrease of 14% from the subscribers
served by SNG at December 31, 2000. We expect the declines in the circulation
of TV Guide Magazine and the subscriber base of the C-band industry, and the
resulting impacts on revenues in this sector, to continue. The impacts of the
circulation and subscriber declines on revenue were partially offset by an
increase in the newsstand price of TV Guide Magazine, an increase in the price
of programming packages offered by SNG and revenues earned from the subscriber
conversion agreement with EchoStar Satellite Corporation ("EchoStar").
On November 2, 1999, SNG signed an agreement with EchoStar whereby SNG
promotes and solicits orders for EchoStar's direct broadcast subscription
service, the DISH Network. In exchange, SNG receives an initial commission for
each current or past SNG subscriber who subscribes to the DISH Network and a
monthly residual commission over the life of the agreement. This agreement has
resulted in an acceleration in the decline in the number of SNG subscribers and
this effect is expected to continue.
Pro forma expenses for this sector were $726.7 million for 2001 compared to
$887.2 million for 2000. A significant portion of the expenses in this sector
are those attributable to the paper, printing, and postage associated with TV
Guide Magazine and programming acquired by SNG for programming packages sold to
its customers. The decrease in expenses of $160.5 million in this sector is
primarily due to the decrease in circulation of TV Guide Magazine and reduced
programming expenses associated with the decrease in the number of C-band
subscribers.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
20
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
For the twelve months ended December 31, 2001, pro forma EBITDA for this
sector decreased by 3% despite a 15% decline in revenues compared to the prior
year.
The Company has traditionally operated a magazine distribution business
which was responsible for distributing approximately 90 titles with a combined
circulation of approximately 410 million copies per year in addition to the TV
Guide Magazine. Due to the change in business environment, and following the
general approach of discontinuing non-core activities in order to focus on core
business, the Company is considering business alternatives, including
contracting with a third party for distribution of TV Guide Magazine and
assigning the existing distribution contracts to that same party. The
distribution business generates approximately $12.6 million in revenue with no
significant impact on EBITDA.
Liquidity and Capital Resources
For the twelve months ended December 31, 2001, net cash flows from operating
activities were $186.5 million. This cash flow, plus existing cash resources,
proceeds from asset sales of $107.0 million and proceeds from the exercise of
stock options of $20.3 million, was used to fund $249.8 million for repayment
of long-term debt, $71.1 million to repurchase substantially all of the
remaining outstanding TV Guide 8 1/8% senior subordinated notes, $38.0 million
for investments and acquisitions, $18.9 million for capital expenditures and
$56.1 million for additions to intangible assets.
At December 31, 2001, the Company's cash, cash equivalents and marketable
securities classified as current assets aggregated $391.5 million.
Net cash flows from operating activities decreased $126.0 million for the
year ended December 31, 2001 compared to $312.5 million generated during the
nine months ended December 31, 2000 due primarily to the fact that the 2000
period included cash flows resulting from the October 2000 settlement agreement
with General Instrument/Motorola.
The Company's wholly owned subsidiary, TV Guide, has a $300 million six-year
revolving credit facility and a $300 million four-year amortizing term loan,
both expiring in February 2005 with a group of banks. Borrowings under the
credit facilities bear interest (2.9% at December 31, 2001) either at the
banks' prime rate or LIBOR, both plus a margin based on a sliding scale tied to
TV Guide's leverage ratio, as defined in the facility. The credit facilities
are guaranteed by certain subsidiaries of TV Guide and the stock of TV Guide's
subsidiaries is pledged as collateral. The credit facilities impose
restrictions on TV Guide's ability to pay dividends to the Company tied to TV
Guide's leverage ratio. This restriction does not apply to the Company's
ability to pay dividends. As of December 31, 2001, TV Guide had available
borrowing capacity under the six-year revolving credit facility of $146.6
million. Principal payments of $60 million in 2002, $90 million in 2003 and $23
million in 2004 are due under the $300 million amortizing term loan.
Outstanding borrowings under both credit facilities at December 31, 2001 and
2000 were $326.4 million and $568.7 million, respectively.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
21
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
The Company is party to a loan guaranty to assist a printing services
supplier in obtaining a line of credit and term loans with a bank. The maximum
expense to the Company created by this guaranty is $10.0 million.
On June 18, 2001, the Company completed a tender offer in which it acquired
substantially all of the outstanding 8 1/8% senior subordinated notes of TV
Guide at a price of $1,045 per $1,000 principal amount of notes tendered for an
aggregate purchase price of $71.1 million plus accrued interest. In connection
with the tender offer, the indenture for the notes was amended to delete or
modify most of the restrictive covenants. An extraordinary loss of $2.1
million, net of tax, was recognized as a result of this transaction.
The Company collects in advance a majority of its TV Guide Magazine
subscription fees, Superstar/Netlink Group subscription fees and certain of its
UVTV superstation and TV Guide Channel revenues. In addition, the Company
receives nonrefundable prepaid license fees from certain licensees. As of
December 31, 2001, deferred revenue totaled $370.9 million. The Company's
liability for prepaid magazine subscriptions is limited to the unearned
prepayments in the event customers cancel their subscriptions. The Company's
liability for other prepayments is limited to a refund of unearned prepayments
in the event that the Company is unable to provide service. No material refunds
have been paid to date.
The Company does not have any material commitments for capital expenditures.
The Company believes that the anticipated cash flows from operations, and
existing cash, cash equivalents and short-term marketable securities balances,
will be sufficient to satisfy its expected working capital, capital expenditure
and debt requirements in the foreseeable future.
At December 31, 2001, approximately $112.9 million, or 40%, of the Company's
receivables are due from five entities. The Company currently believes these
receivables to be realizable; however, events may occur in the future which
could cause the Company to change its assessment of the amount of
recoverability.
In connection with the acquisition of TV Guide in 2000, The News Corporation
Limited ("News Corp.") became a stockholder of the Company. As of December 31,
2001, News Corp. directly and indirectly owns approximately 42% of the
Company's outstanding common stock and has the right to designate six directors
on the Company's board. The Company earned advertising revenues of $19.3
million and $10.4 million for the year ended December 31, 2001 and the period
from the date of the TV Guide acquisition through December 31, 2000,
respectively, from entities controlled by News Corp. During those same periods,
the Company acquired programming from News Corp. controlled entities of $11.3
million and $7.8 million, respectively. Prior to its acquisition of TV Guide,
the Company did not have any significant transactions with News Corp. As of
December 31, 2001 and 2000, the Company had receivables due from News Corp.
controlled entities totaling $4.6 million and $9.5 million, respectively, and
payables due to News Corp. controlled entities totaling $302,000 and $965,000,
respectively. In addition, the Company purchases paper through a paper
procurement arrangement with News Corp. at negotiated prices with paper
suppliers based on the combined paper requirements of the two organizations.
Liberty Media Corporation ("Liberty Media"), formerly an indirect wholly
owned subsidiary of AT&T Corp., directly or indirectly owned approximately 21%
of the issued and outstanding common stock of the
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
22
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Company from the date of the acquisition of TV Guide in 2000 until May 2, 2001,
the date Liberty Media sold its interest in the Company to News Corp. For the
period January 1, 2001 to May 2, 2001, the date Liberty Media ceased to be
considered a related party of the Company, and the period from the date of the
TV Guide acquisition through December 31, 2000, the Company purchased
programming from Liberty Media controlled affiliates of $4.5 million and $7.4
million, respectively. During those same periods, the Company also sold video,
program promotion and guide services and subscriber management services to AT&T
Broadband and Internet Services ("BIS") and its consolidated affiliates of $6.7
million and $8.4 million, respectively. In addition, during those same periods,
the Company purchased production services and was provided satellite
transponder facilities and uplink services from BIS consolidated affiliates of
$2.4 million and $3.9 million, respectively. BIS is also wholly owned by AT&T
Corp. Prior to its acquisition of TV Guide, the Company did not have any
significant transactions with Liberty Media or BIS.
The Company has included in the amounts discussed above, transactions with
News Corp., BIS, and Liberty Media and all entities in which BIS, Liberty Media
and News Corp. have an interest greater than 50%. In addition, the Company has
transactions with entities in which BIS, Liberty Media and News Corp. own,
directly or indirectly, 50% or less.
The Company has multiple transactions with Thomson multimedia, Inc.,
including Thomson's licensing of the Company's VCR Plus+, GUIDE Plus+ and eBook
technologies, Thomson's advertising on the Company's platforms, primarily the
interactive program guide platforms, the Company's participation in marketing
and promotion campaigns on Thomson products carrying the Company's technology,
and the two companies being joint venture partners in the sale of advertising
on electronic program guides on televisions. During the year ended December 31,
2001, revenues earned from the relationship with Thomson were $76.2 million and
expenses incurred were $34.6 million. As of December 31, 2001, the Company has
receivables due from and a payable due to Thomson totaling $53.2 million and
$36.5 million, respectively. Subsequent to December 31, 2001, the Company
received payments from Thomson which reduced the current receivable from
Thomson to the Company, net of amounts due to Thomson, to less than $5 million.
The Company's accounting policy with respect to patent prosecution and
litigation costs to protect and enforce the Company's intellectual property
rights is to defer such costs as intangible assets as they are incurred. The
Company has been engaged in a proceeding before the United States International
Trade Commission (See Item 3., Legal Proceedings) in which approximately $38
million of legal and related costs have been incurred and capitalized as
intangible assets with a carrying value of $34.6 million as of December 31,
2001. The Company is currently awaiting a ruling on this matter. Should such a
ruling be adverse to the Company, the Company may be required to expense a
portion of the legal costs previously capitalized related to this proceeding,
including a portion of the costs incurred subsequent to December 31, 2001.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
23
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board's ("FASB's")
Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No.
01-09, Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products). EITF No. 01-09 clarifies the income
statement classification of costs incurred by a vendor for certain cooperative
advertising and product placement paid to a vendor's customers. As a result of
the EITF consensus, certain of the Company's cooperative advertising and
product placement costs previously classified as operating expenses are to be
reflected as a reduction of revenues earned from that activity. EITF No. 01-09
is effective commencing January 1, 2002 and requires, where applicable,
reclassification of amounts reported in prior periods to comply with the income
statement classifications for the current period. Such reclassifications are
not expected to exceed $60 million, $20 million and $10 million for the year
ended December 31, 2001, the nine months ended December 31, 2000 and the year
ended March 31, 2000, respectively.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. The Company adopted the provisions of Statement
141 effective July 1, 2001 and is required to adopt the provisions of Statement
142 effective January 1, 2002. Pursuant to the transition provisions of
Statement No. 142, any goodwill and any intangible asset determined to have an
indefinite useful life that were acquired in a purchase business combination
completed subsequent to June 30, 2001 were not amortized, but continued to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature through December 31, 2001.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption.
Furthermore, in connection with the transitional goodwill impairment
evaluation, Statement 142 will require the Company to perform, within six
months of adoption, an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. Any transitional impairment
loss will be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations.
As of December 31, 2001, the Company has unamortized goodwill in the amount
of $5.6 billion and unamortized identifiable intangible assets with indefinite
lives, primarily trademarks and publishing rights, in the
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
24
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
amount of approximately $888 million which will no longer be subject to
amortization under the provisions of Statement 142. Amortization expense
related to such assets was $486.4 million and $231.3 million for the year ended
December 31, 2001 and the nine months ended December 31, 2000, respectively.
The Company is currently in the process of evaluating the potential impairment
impacts of adopting Statement 142 on its financial statements. Based on the
Company's analysis completed to date, the Company expects to report
transitional impairment losses of up to $5 billion upon adoption of Statement
142 in the first quarter of 2002. Pursuant to the provisions of Statement 142,
any transitional impairment losses will be reported as a cumulative effect of a
change in accounting principle.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement replaces Statement
121. However, it retains the fundamental provisions of Statement 121 for
recognition and measurement of the impairment of long-lived assets to be held
and used and for measurement of long-lived assets to be disposed of by sale.
This statement applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, for the disposal of segments of a business. This statement requires
that those long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. The Company is required to adopt this statement
effective January 1, 2002. The Company does not expect that the adoption of
this statement will have a material impact on the consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Unaudited Consolidated Financial Statements on page F-1.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
25
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
PART III
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth certain summary information concerning the
compensation paid by the Company for the fiscal years ended December 31, 2001,
March 31, 2000 and March 31, 1999 to the Company's chief executive officer and
certain other officers of the Company during the fiscal year ended December 31,
2001 (collectively, the "Named Executive Officers"):
Long Term
Annual Compensation Compensation
------------------------------------ ---------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Positions Twelve Months Salary Bonus Compensation Award(s) Options Compensation
as of December 31, 2001 Ended ($) ($) ($) ($) (#) ($)
----------------------- ----------------- --------- ---------- ------------ ---------- ---------- ------------
Henry C. Yuen................. December 31, 2001 4,581,198 $4,080,418 254,494(1) -- 2,693,930 485,263(2)
Chief Executive Officer December 31, 2000 2,255,443(3) 3,473,724(4) 233,710(1) -- 3,330,180 487,544(2)
and Chairman of the Board March 31, 2000 1,921,590 2,911,714 -- -- 3,438,984 490,159(2)
Elsie M. Leung................ December 31, 2001 1,307,832 546,383 144,872(1) -- -- 71,376(5)
Chief Financial Officer, Co- December 31, 2000 961,634(3) 466,030(4) 73,469(1) -- 2,400,000 1,400(5)
President and Co-Chief March 31, 2000 819,292 327,717 -- -- -- 1,400(5)
Operating Officer
Joachim Kiener (6)............ December 31, 2001 889,013 -- -- -- -- 2,937,002(7)
Former Co-President and December 31, 2000 412,597(8) 139,315(9) -- -- -- 19,342(10)
Co-Chief Operating Officer March 31, 2000 -- -- -- -- -- --
Peter C. Boylan III (11)...... December 31, 2001 882,872 300,000 -- -- -- 101,797(10)
Co-President and December 31, 2000 405,685(8) 142,759(9) 286,833(1) -- -- 15,303(10)
Co-Chief Operating Officer March 31, 2000 -- -- -- -- -- --
- --------
(1) Amount represents other benefits paid pursuant to the officer's employment
agreement.
(2) Amount represents premiums paid for split dollar life insurance policies.
(3) In November 2000, the Company changed its fiscal year from March 31 to
December 31, and as a result, salary figures reported here for the calendar
year ended December 31, 2000 include overlap from January 1, 2000 to March
31, 2000 with salary figures for the fiscal year ended March 31, 2000. The
amount of overlap is as follows: Dr. Yuen: $494,387; and Ms. Leung:
$210,788.
(4) In November 2000, the Company changed its fiscal year from March 31 to
December 31, and as a result, bonus figures reported here for the calendar
year ended December 31, 2000 include overlap from January 1, 2000 to March
31, 2000 with bonus figures for the fiscal year ended March 31, 2000. The
cash portion of Dr. Yuen's bonus earned for the nine months ended December
31, 2000 was $2,718,111, and the amount of overlap is equal to $755,613.
Ms. Leung's bonus earned for the nine months ended December 31, 2000 was
$381,715 and the amount of overlap is equal to $84,315. Dr. Yuen is
permitted to elect to receive a portion of his bonus in the form of stock
options in accordance with his employment agreement.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
26
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
(5) Amount represents matching contributions by the Company under the Gemstar
Employees 401(k) and Profit Sharing Plan and SERP deferral matching
contributions.
(6) Mr. Kiener became Co-President and Co-Chief Operating Officer on July 12,
2000 and resigned as an executive officer on November 28, 2001.
(7) Under the terms of a separation and consulting agreement, Mr. Kiener agreed
to provide consulting services to the Company for a three-year period.
Under the agreement, Mr. Kiener was paid $2.58 million and the Company
agreed to pay $248,494 for tax and related legal expenses incurred by Mr.
Kiener. Amount also includes $108,508 of matching contributions under the
Company's 401(k) and SERP deferral plans, and other amounts paid under the
terms of an employment agreement.
(8) Amount represents salary paid from July 12, 2000 through December 31, 2000.
Mr. Boylan and Mr. Kiener became executive officers of the Company on July
12, 2000 upon consummation of the Merger with TV Guide. Mr. Boylan resigned
as an executive officer effective April 1, 2002, and Mr. Kiener resigned as
an executive officer effective November 28, 2001.
(9) Amount represents bonus attributable to the year ended December 31, 2000,
pro-rated for the period from July 12, 2000 through December 31, 2000. Mr.
Boylan and Mr. Kiener became executive officers of the Company on July 12,
2000 upon consummation of the Merger with TV Guide. Mr. Boylan resigned as
an executive officer on April 1, 2002, and Mr. Kiener resigned as an
executive officer effective November 28, 2001.
(10) Amount represents employer matching on SERP deferrals and group term life
insurance premiums.
(11) Mr. Boylan became Co-President and Co-Chief Operating Officer on July 12,
2000 and resigned as an executive officer on April 1, 2002.
Summary of Option Grants
The following table provides certain summary information concerning grants
of options to the Named Executive Officers of the Company during the fiscal
year ended December 31, 2001.
Option Grants in the Last Fiscal Year
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise for Option Term
- - Options Employees in Price per Expiration -----------------------------
Name Granted Fiscal Year Share Date 5% 10%
- ---- ---------- ------------ --------- ---------- ----------- ------------
Henry C. Yuen(1)... 2,497,635 78.4% $37.41 6/19/11 $58,761,729 $148,913,758
196,295 6.2% $46.02 7/12/11 $ 5,681,117 $ 14,397,066
Elsie M. Leung..... -- -- -- -- -- --
Joachim Kiener..... -- -- -- -- -- --
Peter C. Boylan III -- -- -- -- -- --
- --------
(1) Represents 2,497,635 options granted to Dr. Yuen under the terms of his
employment agreement and 196,295 options which Dr. Yuen elected to receive
in lieu of a fiscal 2000 cash bonus payable to him under
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
27
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
his employment agreement. See "Employment Contracts--Amended and Restated
Employment Agreement with Dr. Yuen" below. Annual number of options granted
to Dr. Yuen under his employment agreement has been prorated in connection
with a change in the compensation period under the agreement.
Summary of Options Exercised
The following sets forth certain summary information concerning the exercise
of stock options by the Named Executive Officers during the year ended December
31, 2001 together with the fiscal year-end value of unexercised options. The
following does not reflect the cancellation of certain options in 2002 pursuant
to the Restructuring. See "Management Restructuring" below.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option
Values
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at Fiscal Year End at Fiscal Year End(1)
Acquired Value ------------------------- --------------------------
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ----------- ------------- ------------ -------------
Henry C. Yuen...... 1,000,000 $14,625,000 23,641,196 19,293,117 $538,869,994 $131,725,270
Elsie M. Leung..... 300,000 4,613,750 5,730,000 4,000,000 126,150,250 32,320,000
Joachim Kiener..... 140,000 1,537,200 1,004,380 -- 38,018 --
Peter C. Boylan III -- -- 1,793,900 912,209 29,525,105 684,644
- --------
(1) Value of the securities underlying the "in the money" options at year end
minus the exercise price of the options based on the closing price of
$27.70 for the Company's Common Stock on December 31, 2001.
Compensation Committee Interlocks and Insider Participation
From July 20, 2001 through January 2002, the members of the Compensation
Committee were Chase Carey, George F. Carrier, James E. Meyer, Lachlan K.
Murdoch and Henry C. Yuen. Dr. Yuen is an officer of the Company. Mr. Carey,
Mr. Carrier, Mr. L. Murdoch and Mr. Meyer are not and have never been employees
or officers of the Company. In January 2002, Mr. Carey resigned as a director
and member of the compensation committee. In February 2002, Mr. Carrier passed
away, and was replaced with Mr. Lerner. Mr. Lerner is not and has never been an
employee or officer of the Company. In April 2002, Mr. Carey's vacancy on the
compensation committee was filled by Mr. Chernin. Mr. Chernin is not and never
has been an employee or officer of the Company.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
28
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Employment Contracts
Amended and Restated Employment Agreement with Dr. Yuen
On January 7, 1998, the Company's Compensation Committee and Board approved
an Amended and Restated Employment Agreement, and on October 4, 1999, the Board
approved Amendment No. 1 to the Amended and Restated Employment Agreement which
became effective upon the consummation of the Merger. In June 2001, the Company
and Dr. Yuen signed an Amendment No. 2 to Dr. Yuen's employment agreement,
which was dated as of May 4, 2001.
Dr. Yuen's employment agreement provides for his service to the Company as
its Chief Executive Officer, President and Chairman of the Board and to Gemstar
Development Corporation ("GDC") as its Chief Executive Officer and President
through July 12, 2004, subject to a three-year renewal term and to earlier
termination under certain circumstances. In connection with the Merger between
the Company and TV Guide on July 12, 2000, Dr. Yuen relinquished his title as
President of the Company.
The agreement includes provisions pursuant to which Dr. Yuen's annual base
salary ("Base Salary") is adjusted and his merit bonus, annual incentive bonus
and annual stock option grants are calculated. Dr. Yuen's Base Salary was
initially set at $1 million in 1998. The agreement provides for annual
adjustments to Dr. Yuen's Base Salary determined based on a comparison of year
over year financial results.
The Amended and Restated Employment Agreement, as amended by Amendment No. 1
and Amendment No. 2 is hereinafter referred to as the "Yuen Agreement". The
Yuen Agreement allows Dr. Yuen to elect to receive a portion of the merit and
annual incentive bonuses in the form of options to acquire shares of common
stock of the Company in lieu of receiving the Merit Bonus and the Annual
Incentive Bonus in cash. For the year ended December 31, 2000, Dr. Yuen elected
to receive a portion of his bonus in the form of options to purchase the
Company's common stock.
The Yuen Agreement provided for a grant to Dr. Yuen in January 1998 of
options to purchase 16,650,900 shares of common stock of the Company and annual
grants of options to purchase 3,330,180 shares (2,497,635 shares in 2001, in
connection with a change in the Company's fiscal year) of common stock (as
adjusted for all stock splits). The Company's stockholders approved these stock
option grants to Dr. Yuen at the 1998 Special Meeting. Dr. Yuen is also
entitled to $1,000 a month automobile allowance and other benefits, including
health insurance and participation in bonus and incentive and stock option
compensation plans.
The Yuen Agreement entitles Dr. Yuen to terminate the Yuen Agreement within
90 days following a change of control (as defined below), in which event (1) he
would be entitled to receive (a) a lump-sum payment equal to five times his
then-current Base Salary, (b) for a period of 60 months following such
termination, all other elements of his compensation provided under the Yuen
Agreement, (2) all unvested options granted to him pursuant to the Yuen
Agreement would immediately vest in full and would be exercisable for their
full term and all previously granted vested options to acquire shares of common
stock will remain fully exercisable for their
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
29
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
full term. A "change of control" is defined as of the end of the fiscal year
2000 as the occurrence of any of the following: (i) the acquisition (other than
from the Company directly or from any Company stockholder who was, as of the
effective date of the Yuen Agreement, a 25% stockholder of the Company) by any
person or entity of beneficial ownership of 25% or more of the Company's
outstanding shares; (ii) the acquisition (other than from GDC directly or from
any GDC stockholder who was, as of the effective date of the Yuen Agreement, a
25% stockholder of GDC) by any person or entity of beneficial ownership of 25%
or more of GDC's outstanding shares; (iii) during any period of two consecutive
years, individuals who, at the beginning of such period, constituted the board
of directors of the Company or GDC (together with any new directors whose
election or appointment to such board of directors or whose nomination for
election by the stockholders of the Company or GDC was approved by Dr. Yuen or
by a vote of a majority of the directors then still in office who are either
directors at the beginning of such period or whose election, appointment or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of directors of the Company or GDC then in
office; (iv) approval by the board of directors or a majority of the
stockholders of either the Company or GDC of a merger, reorganization,
combination or consolidation whereby the stockholders of either the Company or
GDC immediately prior to such approval will not, immediately after consummation
of such reorganization, merger, combination or consolidation, own more than 50%
of the voting stock of the surviving entity; or (v) a liquidation or
dissolution of either the Company or GDC or the sale of all or substantially
all of the assets of either the Company or GDC, unless the successor to the
assets in any such liquidation, dissolution or sale, is the Company or any of
its subsidiaries. This definition was modified upon the consummation of the
Merger on July 12, 2000 to exclude from the definition of a change in control
the acquisition from Dr. Yuen of more than 25% of the Company's outstanding
shares pursuant to a right of first refusal granted by Dr. Yuen to Liberty
Media Corporation and The News Corporation Limited pursuant to a stockholders
agreement entered into in connection with the Merger.
Under the Yuen Agreement, if Dr. Yuen's employment is terminated without
cause (including a failure to extend the term of the agreement) or if Dr.
Yuen's employment is constructively terminated, then (1) Dr. Yuen would be
entitled to receive (a) a lump-sum payment equal to five times his then-current
Base Salary, and (b) for a period of 60 months following such termination
certain other additional benefits provided under his employment agreement and
(2) all unvested options granted to him pursuant to the Yuen Agreement would
immediately vest in full and would be exercisable for their full term and all
previously granted vested options would remain fully exercisable for their term.
Under the Yuen Agreement, as well as under a similar provision under Dr.
Yuen's former employment agreement, all inventions, designs, improvements,
patents, copyrights, discoveries and other intellectual property which (i) are
developed by Dr. Yuen while performing his duties for GDC or using GDC's
equipment or trade secret information, (ii) are related at the time of
conception to GDC's business or actual or demonstrably anticipated research, or
(iii) result from any work performed by Dr. Yuen for GDC, are the property of
GDC, if and only to the extent GDC can show by clear and convincing evidence
that such property is GDC's property.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
30
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Employment Agreement with Ms. Leung
The Company and GDC entered into an Amended and Restated Employment
Agreement with Ms. Leung, dated as of March 31, 1998 and an amendment to the
Employment Agreement dated as of April 13, 2000 (as amended, the "New Leung
Agreement"), which supersedes and replaces Ms. Leung's former employment
agreement. The New Leung Agreement provides for an initial term effective from
January 1, 1998 through September 30, 2005. There is no provision for renewal.
Under the New Leung Agreement, Ms. Leung will serve as Chief Financial
Officer of the Company and Chief Operating Officer and Chief Financial Officer
of GDC. Ms. Leung will also serve as a director of the Company, GDC and
StarSight. Ms. Leung's annual base salary was initially $700,000 and is subject
to annual adjustments based upon the Company's financial performance. In 1999,
2000 and 2001, Ms. Leung's base salary was adjusted to $843,150, $1,046,265 and
$1,360,145, respectively. Effective March 1, 2002, Ms. Leung's base salary was
adjusted to approximately $1,768,189.
The New Leung Agreement also provides that Ms. Leung may receive an annual
incentive bonus based upon the Company's financial performance. Under the New
Leung Agreement, Ms. Leung was granted options on March 31, 1998 to purchase
4,800,000 shares of common stock and options on April 13, 2000 to purchase
2,400,000 shares of common stock (as adjusted for all stock splits), scheduled
to vest on each anniversary over the term of the New Leung Agreement. Ms. Leung
is also entitled to a $750 per month automobile allowance and other benefits,
including health insurance and participation in bonus and incentive and stock
option compensation plans.
The New Leung Agreement provides Ms. Leung the right to terminate the New
Leung Agreement within 90 days following a change of control (defined
substantially as defined above with respect to the Yuen Agreement), in which
event (1) she would be entitled to receive (a) a lump-sum payment equal to five
times her then-current base salary, (b) for a period of 60 months following
such termination, all other elements of her compensation provided under the New
Leung Agreement, (2) all unvested options granted to her under the New Leung
Agreement would immediately vest in full and would be exercisable for their
full term and all previously granted vested options to acquire shares of common
stock will remain fully exercisable for their full term. Ms. Leung agreed in
the amendment to her Employment Agreement that the consummation of the Merger
would not result in a change in control under her Employment Agreement.
Under the New Leung Agreement, if Ms. Leung's employment is terminated
without cause (including a failure to extend the term of the agreement) or if
Ms. Leung's employment is constructively terminated, then (1) Ms. Leung would
be entitled to receive (a) a lump-sum payment equal to the greater of (i) three
times her then-current Base Salary or (ii) her then-current Base Salary
multiplied by the number of years, rounded up, remaining in the term, and (b)
for a period of 60 months following such termination certain other additional
benefits provided under her employment agreement and (2) all unvested options
granted to her would immediately vest in full and would be exercisable for
their full term and all previously granted vested options would remain fully
exercisable for their term.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
31
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
All inventions, designs, improvements, patents, copyrights and discoveries
conceived by Ms. Leung during the term of the New Leung Agreement, which are
competitive with or related to existing products or services of GDC, shall be
assigned to GDC.
Agreement with Jonathan Orlick
GDC entered into an Employment Agreement with Mr. Orlick, dated as of
January 3, 2001, in his capacity at the time as Deputy General Counsel. The
term of the agreement ends on the fifth anniversary of the agreement. Mr.
Orlick's base salary pursuant to the agreement was initially $500,000. The base
salary will be increased annually by any percentage increase in the Consumer
Price Index. The employment agreement provides that Mr. Orlick will be eligible
to receive a bonus of up to 20% of his annual base salary. There is no
guaranteed minimum bonus.
Termination without cause will entitle Mr. Orlick to a lump sum payment
equal to the difference between 24 months of salary at his then current annual
salary, and the cumulative salary received by Mr. Orlick commencing from the
date of his notification of termination through the date of termination. In
addition, in the event that fewer than 40% of the stock options granted to Mr.
Orlick pursuant to the employment agreement have vested, an amount of shares
will accelerate and vest so that the percentage of vested stock options granted
pursuant to the agreement equals 40%. In the event of a consolidation or merger
of GDC with or into another corporation, or the sale of all, or substantially
all, of GDC's assets to another corporation, the surviving corporation is
required to assume the obligations under Mr. Orlick's employment agreement. In
such event, Mr. Orlick's employment obligations will continue in favor of the
surviving corporation.
The Company and Mr. Orlick entered into an Amended and Restated Employment
Agreement, effective as of March 18, 2002, which amended and replaced his
previous employment agreement with GDC, dated as of January 3, 2001, Mr.
Orlick's title under the agreement is Executive Vice President and General
Counsel. The term of the agreement is for five years. Mr. Orlick's base salary
pursuant to the agreement is initially $600,000. The base salary will be
increased annually at the discretion of the Chief Executive Officer, but in no
event less than any percentage increase in the a specified consumer price
index. The employment agreement provides that Mr. Orlick will be eligible to
receive an annual bonus at the discretion of the Company, but that his annual
bonus will in no event be less than 25% of his annual base salary. Pursuant to
the agreement, the Company granted to Mr. Orlick options to purchase 200,000
shares of the Company's common stock at an exercise price of $8.10 per share.
These options vest in equal amounts annually over a three year period.
Termination without cause will entitle Mr. Orlick to the greater of (1) the
sum of his then current annual base salary and annual bonus, multiplied by the
remaining years left on his agreement; or (2) the sum of his then current
annual base salary and annual bonus. Mr. Orlick will also have the right to
exercise for their full term any vested stock options and any unvested options
which would have vested if he continued his employment. In addition, if (1) Mr.
Orlick has been reassigned by the Company to a position with responsibilities
substantially less or greater than those described in his employment agreement,
(2) Mr. Orlick is assigned duties or
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
32
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
responsibilities inconsistent with his position, or has his responsibilities or
duties materially diminished or materially reduced or increased at any time,
(3) Mr. Orlick's principal office is relocated to a geographic location outside
of the Los Angeles, California area, or (4) Mr. Orlick is required to report to
any person other than Dr. Yuen as Chief Executive Officer of the Company, than
Mr. Orlick will be deemed "constructively terminated" and will be entitled to
the same benefits he would have received had the Company terminated his
employment without cause.
In the event that: (1) any entity acquires 25% or more of the Company's
outstanding stock; (2) News Corp. (and its affiliated entities) sells more than
two-thirds of its existing equity interest in the Company; (3) News Corp.
acquires greater than 43% of the then existing equity securities of the
Company; or (4) News Corp. gains effective control of the Company's Board, then
Mr. Orlick will be entitled to terminate the agreement within 180 days and
receive the same severance package as if he were terminated without cause.
Agreement with Peter C. Boylan III
The Company and Mr. Boylan entered into a Separation and Consulting
Agreement on March 4, 2002 pursuant to which Mr. Boylan resigned April 1, 2002
as an officer and director of the Company. As part of the agreement, Mr. Boylan
agreed to the termination, subject to the survival of certain provisions, of
his existing employment agreement and to provide, subject to the terms of the
agreement, consulting services to the Company for a period of three years.
Under the terms of the agreement, Mr. Boylan will continue to receive certain
benefits, including continuation of medical, dental, and life insurance for
sixty months and received a payment of approximately $4.96 million. In
addition, the Company made a payment of approximately $1.4 million on behalf of
Mr. Boylan to the SERP deferred compensation plan representing unpaid salary,
bonus and accrued vacation. The Company also made a matching contribution of
approximately $57,600 to Mr. Boylan's account under the SERP Deferred
Compensation Plan and under the agreement all of Mr. Boylan's 2,706,109 stock
options, including 885,917 previously unvested stock options, will be
exercisable for their entire remaining term.
Agreement with Joachim Kiener
The Company and Mr. Kiener entered into a Separation and Consulting
Agreement on November 27, 2001 pursuant to which Mr. Kiener agreed to provide,
subject to the terms of the agreement, consulting services to the Company for a
period of three years and, effective November 28, 2001, resigned as an officer
of the Company, and effective June 4, 2001, resigned as a director of the
Company. Under the terms of the agreement, Mr. Kiener will continue to receive
certain benefits, including continuation of medical, dental, and life insurance
for sixty months and received a payment of approximately $2.58 million. The
Company also agreed to pay $248,494 for tax and legal related expenses incurred
by Mr. Kiener. All unvested stock options held by Mr. Kiener were fully vested
and will remain exercisable for their entire remaining term. Mr. Kiener was
previously party to an employment agreement with the Company which is no longer
effective.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
33
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
Compensation of Directors
The Company pays each director who is not an employee of the Company $25,000
per year for services as a director of the Company and $1,000 per Board or
committee meeting attended. All directors are reimbursed for their
out-of-pocket expenses incurred in connection with attendance at meetings of,
and other activities relating to service on, the Board or any committee of the
Board. In addition, directors who are not full-time employees of the Company
are eligible to participate in, and certain of such directors have received
awards pursuant to, the Gemstar--TV Guide International, Inc. 1994 Stock
Incentive Plan, as amended and restated (the "Stock Incentive Plan").
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
34
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The financial statements listed in the Index to Unaudited Consolidated
Financial Statements on page F-1 are filed as part of this Form 10-K/A.
(a)(2) Financial Statement Schedules
The financial statement schedules listed in the Index to Financial Statement
Schedules on page F-1 are filed as part of this Form 10-K/A.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index following the Unaudited
Consolidated Financial Statements are incorporated herein by reference or are
filed with this Form 10-K/A as indicated.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2001.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
35
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GEMSTAR-TV GUIDE INTERNATIONAL,
INC.(Registrant)
Date: November 14, 2002 By:
/s/ JEFF SHELL
------------------------------
Jeff Shell
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 14, 2002 By:
/s/ PAUL HAGGERTY
------------------------------
Paul Haggerty
Acting Chief Financial Officer
(Principal Financial and
Accounting Officer)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
36
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
10-K/A CERTIFICATION
Gemstar-TV Guide International, Inc.
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION
I, Jeff Shell, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K/A of
Gemstar-TV Guide International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: 11/14/02
Jeff Shell
Chief Executive Officer
(Principal Executive Officer)
I, Paul Haggerty, certify that:
1. I have reviewed this amendment to the annual report on Form 10-K/A of
Gemstar-TV Guide International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report.
Date: 11/14/02
Paul Haggerty
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
37
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Unaudited Consolidated Balance Sheets (Restated) as of December 31, 2001 and 2000................... F-2
Unaudited Consolidated Statements of Operations (Restated) for the year ended December 31, 2001, the
nine months ended December 31, 2000 and the year ended March 31, 2000............................. F-3
Unaudited Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss) (Restated) for the year ended December 31, 2001, the nine months ended December 31, 2000
and the year ended March 31, 2000................................................................. F-4
Unaudited Consolidated Statements of Cash Flows (Restated) for the year ended December 31, 2001, the
nine months ended December 31, 2000 and the year ended March 31, 2000............................. F-5
Notes to Unaudited Consolidated Financial Statements................................................ F-6
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts...................................................... F-63
All other schedules are omitted because they are not applicable or the
required information is shown in the Unaudited Consolidated Financial
Statements or Notes thereto.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-1
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Restated Restated
December 31, December 31,
2001 2000
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents............................................................. $ 349,250 $ 488,046
Marketable securities................................................................. 42,212 63,425
Receivables, net...................................................................... 285,076 250,545
Deferred tax asset.................................................................... 14,957 15,969
Other current assets.................................................................. 38,391 36,817
---------- -----------
Total current assets............................................................... 729,886 854,802
Property and equipment, net............................................................... 87,950 92,382
Intangible assets, net.................................................................... 8,621,735 9,516,764
Marketable securities and other investments............................................... 110,289 204,588
Other assets.............................................................................. 23,168 28,582
---------- -----------
$9,573,028 $10,697,118
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses................................................. $ 285,761 $ 221,395
Current portion of long-term debt and capital lease obligations....................... 62,201 62,674
Current portion of deferred revenue................................................... 261,420 233,283
---------- -----------
Total current liabilities.......................................................... 609,382 517,352
Deferred tax liability.................................................................... 1,086,724 1,357,646
Long-term debt and capital lease obligations, less current portion........................ 271,029 586,485
Deferred revenue, less current portion.................................................... 109,507 200,217
Other liabilities......................................................................... 6,286 10,178
Commitments and contingencies (Note 5)....................................................
Stockholders' equity:
Preferred stock, par value $.01 per share. Authorized 150,000 shares, none issued..... -- --
Common stock, par value $.01 per share. Authorized 2,350,000 shares; 417,867 shares
issued and 414,748 shares outstanding at December 31, 2001 and 413,749 shares
issued and 410,960 shares outstanding at December 31, 2000........................... 4,179 4,137
Additional paid-in capital............................................................ 8,360,289 8,290,627
Accumulated deficit................................................................... (838,638) (202,980)
Accumulated other comprehensive income, net of tax.................................... 24,101 31,612
Unearned compensation................................................................. (24,988) (69,717)
Treasury stock, at cost (3,119 shares at December 31, 2001 and 2,789 shares at
December 31, 2000)................................................................... (34,843) (28,439)
---------- -----------
Total stockholders' equity......................................................... 7,490,100 8,025,240
---------- -----------
$9,573,028 $10,697,118
========== ===========
See accompanying Notes to Unaudited Consolidated Financial Statements.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-2
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Restated Restated Restated
Year ended Nine months ended Year ended
December 31, December 31, March 31,
2001 2000 2000
------------ ----------------- ----------
Revenues....................................................... $1,288,918 $ 694,610 $229,211
Operating expenses:
Operating expenses, excluding stock compensation,
depreciation and amortization, impairment of goodwill and
nonrecurring expenses..................................... 910,934 488,939 108,756
Stock compensation.......................................... 44,729 18,294 --
Depreciation and amortization............................... 942,060 443,312 5,863
Impairment of goodwill...................................... 10,800 -- --
Nonrecurring expenses....................................... -- -- 15,895
---------- --------- --------
1,908,523 950,545 130,514
---------- --------- --------
Operating (loss) income........................................ (619,605) (255,935) 98,697
Interest expense............................................... (27,298) (24,783) --
Other (expense) income, net.................................... (119,126) 15,021 13,688
---------- --------- --------
(Loss) income before income taxes and extraordinary item....... (766,029) (265,697) 112,385
(Benefit) provision for income taxes........................... (132,471) (29,570) 38,778
---------- --------- --------
(Loss) income before extraordinary item........................ (633,558) (236,127) 73,607
Extraordinary loss on debt extinguishment, net of tax.......... (2,100) -- --
---------- --------- --------
Net (loss) income.............................................. $ (635,658) $(236,127) $ 73,607
========== ========= ========
Basic (loss) earnings per share:
(Loss) income before extraordinary item..................... $ (1.54) $ (0.71) $ 0.36
Extraordinary item.......................................... 0.00 -- --
---------- --------- --------
Net (loss) income........................................... $ (1.54) $ (0.71) $ 0.36
========== ========= ========
Diluted (loss) earnings per share:
(Loss) income before extraordinary item..................... $ (1.54) $ (0.71) $ 0.30
Extraordinary item.......................................... 0.00 -- --
---------- --------- --------
Net (loss) income........................................... $ (1.54) $ (0.71) $ 0.30
========== ========= ========
Weighted average shares outstanding............................ 412,389 334,804 205,635
Dilutive effect of:
Stock options............................................... -- -- 42,193
Warrants.................................................... -- -- 48
---------- --------- --------
Weighted average shares outstanding, assuming dilution......... 412,389 334,804 247,876
========== ========= ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-3
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
(In thousands)
(Accumulated Accumulated
Common Stock Additional deficit) other
-------------- paid-in retained comprehensive Unearned
Shares Amount capital earnings income (loss) compensation
------- ------ ---------- ------------ ------------- ------------
Balances at March 31, 1999................................ 204,724 $2,047 $ 250,078 $ (38,298) $ (228) $ --
Comprehensive income:
Net income (restated).................................. -- -- -- 73,607 -- --
Unrealized gains on marketable securities.............. -- -- -- -- 37,206 --
Equity adjustment from foreign currency translation.... -- -- -- -- 489 --
Total comprehensive income (restated)................
Issuance of common stock.................................. 1,590 16 30,479 -- -- --
Exercise of stock options................................. 4,164 41 19,896 -- -- --
Tax benefit associated with stock options................. -- -- 33,090 -- -- --
Exercise of warrants...................................... 65 1 124 -- -- --
Adjustment for change in SoftBook Press, Inc. year end.... -- -- -- (2,162) -- --
------- ------ ---------- --------- ------- --------
Balances at March 31, 2000 (restated)..................... 210,543 2,105 333,667 33,147 37,467 --
Comprehensive loss:
Net loss (restated).................................... -- -- -- (236,127) -- --
Unrealized losses on marketable securities............. -- -- -- -- (5,432) --
Equity adjustment from foreign currency translation.... -- -- -- -- (423) --
Total comprehensive loss (restated)..................
Issuance of common stock for acquisitions................. 200,556 2,006 7,873,253 -- -- --
Exercise of stock options................................. 2,650 26 22,307 -- -- --
Tax benefit associated with stock options................. -- -- 61,400 -- -- --
Unearned stock option compensation........................ -- -- -- -- -- (88,011)
Amortization of unearned compensation..................... -- -- -- -- -- 18,294
------- ------ ---------- --------- ------- --------
Balances at December 31, 2000 (restated).................. 413,749 4,137 8,290,627 (202,980) 31,612 (69,717)
Comprehensive loss:
Net loss (restated).................................... -- -- -- (635,658) -- --
Unrealized losses on marketable securities (restated).. -- -- -- -- (7,022) --
Equity adjustment from foreign currency translation.... -- -- -- -- (489) --
Total comprehensive loss (restated)
Exercise of stock options................................. 3,377 34 20,239 -- -- --
Tax benefit associated with stock options................. -- -- 21,580 -- -- --
Issuance of common stock for acquisition.................. 741 8 27,843 -- -- --
Amortization of unearned compensation..................... -- -- -- -- -- 44,729
Purchase of treasury stock................................ -- -- -- -- -- --
------- ------ ---------- --------- ------- --------
Balances at December 31, 2001 (restated).................. 417,867 $4,179 $8,360,289 $(838,638) $24,101 $(24,988)
======= ====== ========== ========= ======= ========
Treasury stock Total
---------------- stockholders'
Shares Amount equity
------ -------- -------------
Balances at March 31, 1999................................ (2,789) $(28,439) $ 185,160
Comprehensive income:
Net income (restated).................................. -- -- 73,607
Unrealized gains on marketable securities.............. -- -- 37,206
Equity adjustment from foreign currency translation.... -- -- 489
----------
Total comprehensive income (restated)................ 111,302
Issuance of common stock.................................. -- -- 30,495
Exercise of stock options................................. -- -- 19,937
Tax benefit associated with stock options................. -- -- 33,090
Exercise of warrants...................................... -- -- 125
Adjustment for change in SoftBook Press, Inc. year end.... -- -- (2,162)
------ -------- ----------
Balances at March 31, 2000 (restated)..................... (2,789) (28,439) 377,947
Comprehensive loss:
Net loss (restated).................................... -- -- (236,127)
Unrealized losses on marketable securities............. -- -- (5,432)
Equity adjustment from foreign currency translation.... -- -- (423)
----------
Total comprehensive loss (restated).................. (241,982)
Issuance of common stock for acquisitions................. -- -- 7,875,259
Exercise of stock options................................. -- -- 22,333
Tax benefit associated with stock options................. -- -- 61,400
Unearned stock option compensation........................ -- -- (88,011)
Amortization of unearned compensation..................... -- -- 18,294
------ -------- ----------
Balances at December 31, 2000 (restated).................. (2,789) (28,439) 8,025,240
Comprehensive loss:
Net loss (restated).................................... -- -- (635,658)
Unrealized losses on marketable securities (restated).. -- -- (7,022)
Equity adjustment from foreign currency translation.... -- -- (489)
----------
Total comprehensive loss (restated) (643,169)
Exercise of stock options................................. -- -- 20,273
Tax benefit associated with stock options................. -- -- 21,580
Issuance of common stock for acquisition.................. -- -- 27,851
Amortization of unearned compensation..................... -- -- 44,729
Purchase of treasury stock................................ (330) (6,404) (6,404)
------ -------- ----------
Balances at December 31, 2001 (restated).................. (3,119) $(34,843) $7,490,100
====== ======== ==========
See accompanying Notes to Unaudited Consolidated Financial Statements.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-4
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Restated Restated
Year ended Nine months ended
December 31, December 31,
2001 2000
- - ------------ -----------------
Cash flows from operating activities:
Net (loss) income......................................................................... $(635,658) $(236,127)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization........................................................... 942,060 443,312
Deferred income taxes................................................................... (185,996) (110,829)
Tax benefit associated with stock options............................................... 21,580 61,400
Stock compensation expense.............................................................. 44,729 18,294
Impairment of goodwill.................................................................. 10,800 --
Investment write down................................................................... 109,149 --
Changes in operating assets and liabilities, net of the effect of acquisitions:
Receivables........................................................................... (35,664) 89,327
Other assets.......................................................................... 9,898 2,601
Accounts payable, accrued expenses and other liabilities.............................. (4,937) (46,679)
Deferred revenue...................................................................... (89,478) 91,193
--------- ---------
Net cash provided by operating activities.......................................... 186,483 312,492
--------- ---------
Cash flows from investing activities:
Investments and acquisitions.............................................................. (38,019) (101,331)
Cash acquired in acquisitions............................................................. 2,361 100,033
Purchases of marketable securities........................................................ (104,388) (68,413)
Sales and maturities of marketable securities............................................. 112,061 65,172
Sale of assets............................................................................ 107,011 1,381
Additions to property, plant and equipment................................................ (18,880) (22,959)
Additions to intangible assets............................................................ (56,145) (10,607)
--------- ---------
Net cash provided by (used in) investing activities................................ 4,001 (36,724)
--------- ---------
Cash flows from financing activities:
(Repayments) borrowings under bank credit facilities...................................... (249,750) 298,448
Repayment of senior subordinated notes.................................................... (71,134) (331,864)
Repayment of capital lease obligations.................................................... (2,674) (2,044)
Issuance of common stock.................................................................. -- --
Proceeds from exercise of stock options and warrants...................................... 20,273 22,333
Purchases of treasury stock............................................................... (6,404) --
Distributions to minority interests....................................................... (19,269) (7,498)
Other..................................................................................... -- (3,927)
--------- ---------
Net cash (used in) provided by financing activities................................ (328,958) (24,552)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents................................. (322) (216)
--------- ---------
Net (decrease) increase in cash and cash equivalents............................... (138,796) 251,000
Cash and cash equivalents at beginning of period............................................. 488,046 237,046
Adjustment for change in SoftBook Press, Inc. year end....................................... -- --
--------- ---------
Cash and cash equivalents at end of period................................................... $ 349,250 $ 488,046
========= =========
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................................................ $ 91,161 $ 6,620
Cash paid for interest.................................................................... 31,169 33,597
Restated
Year ended
March 31,
2000
- - ----------
Cash flows from operating activities:
Net (loss) income......................................................................... $ 73,607
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization........................................................... 5,863
Deferred income taxes................................................................... (146)
Tax benefit associated with stock options............................................... 33,090
Stock compensation expense.............................................................. --
Impairment of goodwill.................................................................. --
Investment write down................................................................... --
Changes in operating assets and liabilities, net of the effect of acquisitions:
Receivables........................................................................... (45,460)
Other assets.......................................................................... (7,071)
Accounts payable, accrued expenses and other liabilities.............................. 16,285
Deferred revenue...................................................................... (10,962)
---------
Net cash provided by operating activities.......................................... 65,206
---------
Cash flows from investing activities:
Investments and acquisitions.............................................................. (10,928)
Cash acquired in acquisitions............................................................. --
Purchases of marketable securities........................................................ (146,748)
Sales and maturities of marketable securities............................................. 104,799
Sale of assets............................................................................ --
Additions to property, plant and equipment................................................ (4,191)
Additions to intangible assets............................................................ (5,385)
---------
Net cash provided by (used in) investing activities................................ (62,453)
---------
Cash flows from financing activities:
(Repayments) borrowings under bank credit facilities...................................... --
Repayment of senior subordinated notes.................................................... --
Repayment of capital lease obligations.................................................... --
Issuance of common stock.................................................................. 30,495
Proceeds from exercise of stock options and warrants...................................... 20,062
Purchases of treasury stock............................................................... --
Distributions to minority interests....................................................... --
Other..................................................................................... --
---------
Net cash (used in) provided by financing activities................................ 50,557
---------
Effect of exchange rate changes on cash and cash equivalents................................. 175
---------
Net (decrease) increase in cash and cash equivalents............................... 53,485
Cash and cash equivalents at beginning of period............................................. 185,723
Adjustment for change in SoftBook Press, Inc. year end....................................... (2,162)
---------
Cash and cash equivalents at end of period................................................... $ 237,046
=========
Supplemental disclosures of cash flow information:
Cash paid for income taxes................................................................ $ 4,324
Cash paid for interest.................................................................... --
See accompanying Notes to Unaudited Consolidated Financial Statements.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-5
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2001, the nine months ended December 31, 2000 and the
year ended March 31, 2002
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Gemstar-TV Guide International, Inc. ("Gemstar" or together with its
consolidated subsidiaries, the "Company") is a leading global technology and
media company focused on consumer entertainment. On July 12, 2000, the Company
completed its merger with TV Guide, Inc. ("TV Guide"). The merger was accounted
for as a purchase. Accordingly, the unaudited consolidated financial statements
include the results of operations of TV Guide from July 12, 2000.
The Company has three major business sectors: the Technology and Licensing
Sector, which is responsible for the development, licensing and protection of
intellectual property and proprietary technologies; the Interactive Platform
Sector, which derives recurring income from advertising, interactive services
and e-commerce on the Company's proprietary interactive platforms; and the
Media and Services Sector, which operates TV Guide Magazine, TV Guide Channel,
TVG Network, SkyMall catalog sales, Superstar/Netlink Group and other
non-interactive platforms and media properties. The Company's business sectors
represent strategic business units that offer different products and services
to customers and compete in different industries.
Change in Year End
In November 2000, the Board of Directors of the Company approved the change
of the Company's fiscal year end from March 31 to December 31.
Domestication
In February 2000, Gemstar adopted a new certificate of incorporation and
bylaws and effected a domestication from the British Virgin Islands to the
State of Delaware. The number of authorized shares of Common Stock was
increased from 500 million to 2.35 billion. In addition, the number of
authorized shares of Preferred Stock was increased from 50 million to 150
million.
Principles of Consolidation
The Unaudited Consolidated Financial Statements present the consolidated
financial position, results of operations and cash flows of Gemstar and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-6
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Significant areas requiring the use of management estimates relate to
allowances for doubtful accounts, impairment reserves, litigation reserves,
revenue from license fees, depreciation and amortization, and income taxes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less.
Marketable Securities
The Company classifies its investments as available-for-sale or
held-to-maturity. Held-to-maturity securities are those securities which the
Company has the intent and ability to hold until maturity and are reported at
amortized cost. All other securities are classified as available-for-sale and
are reported at fair value, with unrealized gains and losses, net of any
applicable taxes, recorded in stockholders' equity.
Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents,
marketable securities and trade receivables.
The Company invests the majority of its cash in money market funds,
certificates of deposits, municipal and corporate debt securities and equities.
These investments are diversified among high-grade issues and are maintained
with several high credit quality financial institutions. As part of its cash
management process, the Company performs periodic evaluations of the relative
credit ratings of these financial institutions. The Company has established
guidelines relative to diversification and maturities that attempt to maintain
safety and liquidity. These guidelines are reviewed periodically and modified
to take advantage of trends in yields and interest rates. The Company has not
experienced any credit losses on its cash, cash equivalents or marketable
securities.
There is a concentration of credit risk associated with wholesale
distributors of print products and consumer electronics which may be affected
by changes in economic and industry conditions. Concentration of credit risk
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-7
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Credit Risk (continued)
with respect to programming trade receivables is limited since a substantial
number of the Company's customers pay in advance, providing for receipt of
funds prior to service being rendered, or provide letters of credit as
security. For other customers, service is generally terminated in the event
payment is not received within 30-60 days of service. Credit losses have been
within management's expectations.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Assets
acquired under capital lease arrangements are recorded at the present value of
the minimum lease payments and are amortized over the shorter of the lease term
or useful life of the leased asset. Estimated useful lives are as follows:
Machinery and equipment... 2 to 15 years
Leased transponders....... 9 to 12 years
Buildings and improvements 2 to 32 years
Intangible Assets
Intangible assets are recorded at cost and amortized using the straight-line
method over the estimated useful lives of the assets. Estimated useful lives
are as follows:
Customer lists........ 3 to 5 years
Contracts............. 5 to 10 years
Trademarks and patents 5 to 40 years
Publishing rights..... 15 years
Goodwill.............. 5 to 15 years
The Company assesses goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Recoverability of goodwill is assessed by determining whether the carrying
value of goodwill can be recovered through undiscounted future operating cash
flows. The amount of goodwill impairment, if any, is measured based on a
projected discounted cash flow model using a discounted rate commensurate with
the risk inherent in the Company's current business model. The assessment of
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved. The Company recorded a $10.8 million impairment
charge in the quarter ended December 31, 2001 to reduce
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-8
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Intangible Assets (continued)
goodwill associated with certain international electronic publishing assets. No
similar impairment charges were required in the nine months ended December 31,
2000 or in the year ended March 31, 2000.
Patent Prosecution and Litigation Costs
The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect and enforce the Company's intellectual
property rights is to defer such costs as intangible assets and to amortize
them using the straight-line method over the remaining lives of the related
patents. The Company reviews its characterization of patent prosecution and
litigation costs whenever events or changes in circumstances, such as adverse
administrative or judicial rulings, indicate that certain deferred costs should
be expensed. The propriety of such characterizations is determined by
management based, in part, on the advice of outside counsel.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to the undiscounted future operating cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. No impairment charges were recorded during the year ended
December 31, 2001, the nine months ended December 31, 2000 and the year ended
March 31, 2000. However, future events or changes in circumstances could result
in indicators of impairment and actual impairment charges where none exist
today.
Investments
Investments with ownership interests of less than 20% are generally
accounted for under the cost method of accounting. Investments with ownership
interests between 20% and 50% are accounted for under the equity method of
accounting. Investments with ownership interests less than 20% are accounted
for under the equity method of accounting if the Company is determined to have
significant influence over the operating activities of the investee.
Investments with ownership interests in excess of 50% are consolidated with the
Company.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-9
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Accounting for Stock Options
The Company accounts for its stock option plan under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation by electing to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, and providing pro forma disclosures
regarding net income (loss) and earnings (loss) per share as if the fair value
method defined in SFAS No. 123 had been applied.
Stock Splits
On May 14, 1999, the Company effected a two-for-one stock split in the form
of a stock dividend to holders of record as of April 30, 1999. On December 13,
1999, the Company effected a two-for-one stock split in the form of a stock
dividend to holders of record as of November 29, 1999. All share, per share,
stock option and warrant amounts herein have been restated to reflect the
effects of these splits.
Comprehensive Income (Loss)
During the year ended December 31, 2001, nine months ended December 31, 2000
and the year ended March 31, 2000, comprehensive income (loss) consisted of net
income (loss), unrealized gains (losses) on marketable securities and the
equity adjustment from foreign currency translation. Accumulated other
comprehensive income presented on the accompanying consolidated balance sheets
consist of net unrealized gains (losses) on marketable securities and
cumulative translation adjustments, net of income taxes.
Foreign Currency Translation
The financial statements of foreign subsidiaries with functional currencies
other than the U.S. dollar are translated into U.S. dollars using the exchange
rate at the balance sheet date for assets and liabilities and the average
exchange rate for the period for income and expense items. Gains and losses
resulting from translation are accumulated in a separate component of
stockholders' equity until the investment in the foreign entity is sold or
liquidated. The Company's transactions predominately occur in U.S. dollars.
Gains and losses on currency transactions were immaterial for all periods
presented.
Fair Value of Financial Instruments
Carrying amounts of certain of the Company's financial instruments including
cash and cash equivalents, accounts payable and accrued expenses approximate
their fair value because of their short maturities. Held-to-maturity marketable
securities are reported at amortized cost, which approximates their fair value.
Available-for-
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-10
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Fair Value of Financial Instruments (continued)
sale marketable securities are reported at their fair value based on quoted
market prices. The carrying amount of the Company's outstanding debt
approximates its fair value due to the debt's variable rate of interest.
Revenue Recognition
License Fees
The Company recognizes revenues from per unit license fees based on units
shipped incorporating the Company's patented or proprietary technologies in the
period when the manufacturers' units shipped information is available to the
Company. Revenues from per subscriber fees from service providers are earned in
the month services are provided by a licensee using the Company's patented or
proprietary technologies. Revenues from annual and other license fees generally
are recognized based on the specific terms of the license agreements. From time
to time, the license agreement between the Company and a licensee may expire,
or for one reason or another, the licensee fails to remit license fees on a
timely basis, yet the same units continue to be shipped and the same services
continue to be deployed containing the Company's patented or proprietary
technologies. The Company looks to the four conditions under Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements, ("SAB 101") to
determine whether or not revenue should be recognized: whether there is
persuasive evidence that an arrangement exists, whether delivery has occurred
or service has been rendered, whether the price is fixed or determinable and
whether collection is reasonably assured. Additionally, the Company may
consider opinions of outside counsel when appropriate. These decisions involve
significant judgment by the Company.
In October 2000, the Company reached an agreement with General
Instrument/Motorola to settle outstanding arbitration and litigation
proceedings and enter into a long-term licensing agreement. Revenues are
recognized under this licensing agreement at the time of shipment of the
set-top boxes, based on whether a set-top box is shipped to a licensed MSO, in
which case, only a nominal per unit license fee is recognized in accordance
with the Company's policy. If the set-top box is shipped to an unlicensed MSO,
a higher flat per-unit license fee is recognized.
Programming Services
The Company recognizes revenue in the month the service is provided.
Payments received in advance for subscription services are deferred until the
month earned, at which time income is recognized. The Company's liability is
limited to the unearned prepayments in the event that the Company is unable to
provide service.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-11
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Revenue Recognition (continued)
Magazine Sales
Subscription revenue is recognized on a proportionate basis as magazines are
delivered to subscribers. Newsstand revenues are recognized based on the
on-sale dates of magazines. Allowances for estimated returns are recorded based
upon historical experience. The Company's liability for prepaid magazine
subscriptions is limited to the unearned prepayments in the event customers
cancel their subscriptions.
Advertising
The Company recognizes electronic guide advertising revenue when the related
advertisement is aired. Magazine advertising is recognized upon release of
magazines for sale to consumers. All advertising is stated net of agency
commissions and discounts.
Merchandise Sales and Placement Fees
The Company recognizes merchandise sales upon delivery of product to
customers by the Company or participating merchants, net of estimated returns
and allowances. The Company also recognizes merchandise revenue, net of product
cost, in those transactions in which the Company is acting as an agent.
Placement fees represent fees paid to the Company by participating merchants
for inclusion of their products in the Company's media channels. Placement fee
revenue is recognized on a straight-line basis over the circulation period of a
media channel, generally three months.
Research and Development Costs
Research and development costs related to the design, development and
testing of new systems, applications and technologies are charged to expense as
incurred. Research and development costs of $30.1 million, $20.1 million and
$23.7 million for the year ended December 31, 2001, the nine months ended
December 31, 2000 and the year ended March 31, 2000, respectively, are included
in operating expenses, excluding stock compensation, depreciation and
amortization, impairment of goodwill and nonrecurring expenses.
Advertising Costs
Advertising costs are charged to expense as incurred and totaled $54.6
million, $18.2 million and $10.4 million for the year ended December 31, 2001,
the nine months ended December 31, 2000 and the year ended
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-12
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Advertising Costs (continued)
March 31, 2000, respectively. Advertising costs are included in operating
expenses, excluding stock compensation, depreciation and amortization,
impairment of goodwill and nonrecurring expenses.
Nonrecurring Expenses
In connection with its mergers with NuvoMedia, Inc. ("NuvoMedia") and
SoftBook Press, Inc. ("SoftBook"), the Company recorded merger related costs
totaling $15.9 million in the year ended March 31, 2000. These costs were
comprised of fees for financial advisors, attorneys and accountants, charges
for inventory write down and purchase commitment losses and other transaction
costs.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry- forwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is recorded, if necessary, to reduce
deferred tax assets to an amount management believes is more likely than not to
be realized.
Earnings Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the combination of dilutive common share equivalents and the
weighted average number of common shares outstanding during the period. Diluted
loss per share for the year ended December 31, 2001 and the nine months ended
December 31, 2000 are computed using only the weighted average number of common
shares outstanding during the period, as the inclusion of 38.3 million and 46.2
million, respectively, of common share equivalents would have been antidilutive.
Recent Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board's ("FASB's")
Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No.
01-09, Accounting for Consideration Given by a Vendor to a
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-13
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Recent Accounting Pronouncements (continued)
Customer (Including a Reseller of the Vendor's Products). EITF No. 01-09
clarifies the income statement classification of costs incurred by a vendor for
certain cooperative advertising and product placement paid to a vendor's
customers. As a result of the EITF consensus, certain of the Company's
cooperative advertising and product placement costs previously classified as
operating expenses are to be reflected as a reduction of revenues earned from
that activity. EITF No. 01-09 is effective commencing January 1, 2002 and
requires, where applicable, reclassification of amounts reported in prior
periods to comply with the income statement classifications for the current
period. Such reclassifications are not expected to exceed $60 million, $20
million and $10 million for the year ended December 31, 2001, the nine months
ended December 31, 2000 and the year ended March 31, 2000, respectively.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. The Company adopted the provisions of Statement
141 effective July 1, 2001 and is required to adopt the provisions of Statement
142 effective January 1, 2002. Pursuant to the transition provisions of
Statement No. 142, any goodwill and any intangible asset determined to have an
indefinite useful life that were acquired in a purchase business combination
completed subsequent to June 30, 2001 were not amortized, but continued to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature through December 31, 2001.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption.
Furthermore, in connection with the transitional goodwill impairment
evaluation, Statement 142 will require the Company to perform, within six
months of adoption, an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. Any transitional impairment
loss will be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of operations.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-14
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(1) Description of Business and Summary of Significant Accounting Policies
(continued)
Recent Accounting Pronouncements (continued)
As of December 31, 2001, the Company has unamortized goodwill in the amount
of $5.6 billion and unamortized identifiable intangible assets with indefinite
lives, primarily trademarks and publishing rights, in the amount of
approximately $888 million which will no longer be subject to amortization
under the provisions of Statement 142. Amortization expense related to such
assets was $486.4 million and $231.3 million for the year ended December 31,
2001 and the nine months ended December 31, 2000, respectively. The Company is
currently in the process of evaluating the potential impairment impacts of
adopting Statement 142 on its financial statements. Based on the Company's
analysis completed to date, the Company expects to report transitional
impairment losses upon adoption of Statement 142 in the first quarter of 2002.
Pursuant to the provisions of Statement 142, any transitional impairment losses
will be reported as a cumulative effect of a change in accounting principle.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement replaces Statement
121. However, it retains the fundamental provisions of Statement 121 for
recognition and measurement of the impairment of long-lived assets to be held
and used and for measurement of long-lived assets to be disposed of by sale.
This statement applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, for the disposal of segments of a business. This statement requires
that those long-lived assets be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. The Company is required to adopt this statement
effective January 1, 2002. The Company does not expect that the adoption of
this statement will have a material impact on the unaudited consolidated
financial statements.
Reclassificatons
Certain reclassifications have been made to prior years' financial
information to conform with the current period presentation.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-15
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement
Following the recommendation of the Audit Committee of the Company's Board
of Directors, the Company made a determination to restate its previously filed
consolidated financial statements as of December 31, 2001 and 2000 and for the
year ended December 31, 2001, the nine months ended December 31, 2000 and the
year ended March 31, 2000 related to the following transactions:
(a) The Company entered into a transaction comprised of a series of
agreements beginning in the first quarter of 2001 and completed in the second
quarter of 2001, in which the Company (1) acquired the intellectual property of
a private company in exchange for $750,000 cash and advertising with a fair
value of $20 million, and (2) paid $2 million in exchange for an option to
purchase certain assets of the private company at a price of $3 million (the
"Option"). The sellers of the intellectual property have the right to require
the exercise of the Option if certain performance criteria are met.
Additionally, the Company was conditionally obligated to pay $250,000 upon the
successful transfer of certain patents to the Company. The $250,000 was paid in
the third quarter of 2002.
Initially, the Company recorded the intellectual property purchased at an
amount equal to the $750,000 cash paid to the sellers plus advertising with a
fair value of $20 million granted to the sellers. In addition, the Option and
related legal costs were recorded as an investment of $2.5 million. During
2001, the Company recognized $20 million of advertising revenue as it was used
by the sellers and fully amortized the $20.75 million of intellectual property.
Notwithstanding the contractual terms of the transaction, the Company did
not find sufficient contemporaneous evidence to justify the $20.75 million
valuation for the intellectual property received. The intellectual property was
not appraised at the time of the transaction. Given the substance of the
negotiations considered as a whole, the Company concluded that the most
reliable evidence of the valuation of the intellectual property was the cash
component of the transaction negotiated and agreed upon by the parties.
Consequently, the Company determined that the best evidence of the fair value
of the intellectual property was $6 million, which was the total amount of cash
consideration that the sellers had requested and could receive under the terms
of the transaction.
Accordingly, the Company determined that the transaction should be recorded
as the acquisition of intellectual property for cash and related expenses
totaling $3.4 million. Consequently, the Company reversed $20 million of
advertising revenue from the Interactive Platform Sector as well as $20.75
million of amortization expense. The $20 million correction in Interactive
Platform Sector revenues represents a reduction of 20% of the total revenue for
that sector for the year ended December 31, 2001, as calculated before
restatement. The $3.4 million recorded as intellectual property is being
amortized over its estimated useful life of eight years, commencing with the
third quarter of 2001.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-16
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement (continued)
(b) The Company has reclassified approximately $2.7 million of
multi-platform advertising revenue recorded during the third and fourth
quarters of 2001 from the Interactive Platform Sector to the Media and Services
Sector. The basis for the Company's decision to reclassify this revenue is as
follows:
In the third and fourth quarters of 2001, customers of the Company who had
committed to purchase advertising on Company platforms other than the
Interactive Program Guide ("IPG") (primarily the TV Guide Magazine) were
offered an opportunity to advertise on the IPG platform in amounts
approximately equal in value with their existing commitments to advertise on
the print or online platforms. Customers who accepted this offer were charged
for the IPG advertising and were provided with advertising of an approximate
equal value on the print or online platforms at no additional cost. All of the
revenue associated with these transactions was recorded as IPG revenue. In the
third and fourth quarters of 2001, the amount of the IPG revenue stemming from
these transactions totaled approximately $5.5 million, most of which was
recorded in the fourth quarter.
In the fourth quarter of 2001, the Securities and Exchange Commission
provided additional guidance regarding multiple-element transactions in SAB
101, Frequently Asked Questions and Answers. Question 4. This guidance directed
that revenue in multiple-element transactions should be allocated based upon
the relative fair value of the elements involved in the transaction, provided
that each element represents a separate earnings process. The Company's
decision to reclassify $2.7 million in advertising revenue applies this
guidance, in that the $5.5 million in total advertising value provided to
multi-platform purchasers during the third and fourth quarters of 2001 was
evenly split between IPG and print advertising. The Company, in consultation
with its recently engaged independent accounting firm, is continuing to review
the applicability of the referenced guidance to the multi-platform advertising
transactions and, as a result, may determine that additional revenue should be
reclassified from the Interactive Platform Sector to the Media and Services
Sector.
(c) The Company recognized $58.9 million, $36.5 million and $12.2 million in
licensing revenues during the year ended December 31, 2001, the nine months
ended December 31, 2000 and the year ended March 31, 2000, respectively, under
an expired license agreement with Scientific-Atlanta. Such revenue had been
recognized under SAB 101, as the Company believed there was persuasive evidence
that an arrangement existed, delivery occurred or services had been provided, a
portion of the license fees under the agreement was determinable, and the
amount recognized was deemed to be collectible.
In consultation with its recently engaged independent accounting firm, the
Company determined that it had misapplied the collectibility criteria of SAB
101, as there was insufficient contemporaneous evidence of Scientific-Atlanta's
intent to pay. Accordingly the Company has restated its previously filed
financial statements as of December 31, 2001 and 2000 and for the year ended
December 31, 2001, the nine months ended December,
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-17
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement (continued)
2000 and the year ended March 31, 2000 for the reversal of licensing revenues
related to Scientific-Atlanta in the amounts described above.
(d) The Company discovered that a clerical error had been made in the
calculation of the value of warrants that were received in connection with a
licensing transaction in the second quarter of 2001. The effect of correcting
the error was to reduce the value of the warrants and related deferred revenue
by $11.8 million at the date of the transaction. In addition, deferred revenue
accreted into earnings over an 18-year period was reduced in 2001 by $338,000
as a result of the corrected warrant valuation. During the fourth quarter of
2001, the write-down of the fair value of the investment in the warrants
decreased from $10.4 million as originally recorded to $5.2 million as adjusted.
(e) The Company determined that one of its equity affiliates incorrectly
accounted for warrants of one of its investees. Specifically, the equity
affiliate incorrectly accounted for these warrants under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, instead of
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The impact of the restatement is to record an adjustment of $9.1
million that was previously recorded as other comprehensive income within
stockholders' equity as a charge to other income (expense).
In recording the above mentioned restatements, the Company also recorded the
applicable income tax effects.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-18
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement (continued)
The Unaudited Consolidated Financial Statements as of December 31, 2001 and
2000 and for the year ended December 31, 2001, the nine months ended December
31, 2000 and the year ended March 31, 2000 and notes thereto have been restated
to include the effects of the corrections described above. The following
financial statement line items were impacted:
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
As previously As previously
Restated Reported Restated Reported
December 31, December 31, December 31, December 31,
2001 2001 2000 2000
------------ ------------- ------------ -------------
Receivables, net.................................. $ 285,076 $ 392,717 $ 250,545 $ 299,272
Total current assets.............................. 729,886 837,527 854,802 903,529
Intangible assets, net............................ 8,621,735 8,618,544 n/a n/a
Marketable securities and other investments....... 110,289 119,452 n/a n/a
Total assets...................................... 9,573,028 9,686,641 10,697,118 10,745,845
Accounts payable and accrued expenses............. 285,761 285,642 n/a n/a
Current portion of deferred revenue............... 261,420 261,082 n/a n/a
Total current liabilities......................... 609,382 608,925 n/a n/a
Deferred tax liability............................ 1,086,724 1,127,933 1,357,646 1,375,650
Deferred revenue, less current portion............ 109,507 121,330 n/a n/a
Accumulated deficit............................... (838,638) (771,879) (202,980) (172,257)
Accumulated other comprehensive income, net of tax 24,101 18,380 n/a n/a
Total stockholders' equity........................ 7,490,100 7,551,138 8,025,240 8,055,963
Total liabilities and stockholders' equity........ 9,573,028 9,686,641 10,697,118 10,745,845
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-19
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement (continued)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
As
As previously previously
As previously Restated Reported Restated Reported
Restated Reported Nine months Nine months Year Year
Year ended Year Ended Ended Ended ended ended
December 31, December 31, December 31, December 31, March 31, March 31,
2001 2001 2000 2000 2000 2000
------------ ------------- ------------ ------------- --------- ----------
Revenues.......................... $1,288,918 $1,368,170 $ 694,610 $ 731,109 $229,211 $241,439
Depreciation and amortization..... 942,060 962,722 n/a n/a n/a n/a
Total operating expenses.......... 1,908,523 1,929,185 n/a n/a n/a n/a
Operating (loss) income........... (619,605) (561,015) (255,935) (219,436) 98,697 110,925
Other (expense) income, net....... (119,126) (115,242) n/a n/a n/a n/a
(Loss) income before income
taxes and extraordinary item.... (766,029) (703,555) (265,697) (229,198) 112,385 124,613
(Benefit) provision for income
taxes........................... (132,471) (106,033) (29,570) (16,084) 38,778 43,296
(Loss) income before
extraordinary item.............. (633,558) (597,522) (236,127) (213,114) 73,607 81,317
Net (loss) income................. (635,658) (599,622) (236,127) (213,114) 73,607 81,317
Basic (loss) earnings per share:
(Loss) income before
extraordinary item........... (1.54) (1.45) (0.71) (0.64) 0.36 0.40
Net (loss) income.............. (1.54) (1.45) (0.71) (0.64) 0.36 0.40
Diluted (loss) earnings per share:
(Loss) income before
extraordinary item........... (1.54) (1.45) (0.71) (0.64) 0.30 0.33
Net (loss) income.............. (1.54) (1.45) (0.71) (0.64) 0.30 0.33
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-20
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement (continued)
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands)
Accumulated Other
Accumulated Deficit Comprehensive Total Stockholders'
(Retained Earnings) Income (Loss) Equity
-------------------- ------------------ ----------------------
As As As
Previously Previously Previously
Restated Reported Restated Reported Restated Reported
--------- ---------- -------- ---------- ---------- ----------
Comprehensive income:
Net income (year ended March 31,
2000)............................ $ 73,607 $ 81,317 $ n/a $ n/a $ 73,607 $ 81,317
Total comprehensive income (year
ended March 31, 2000)............ n/a n/a n/a n/a 111,302 119,012
Balances at March 31, 2000............ 33,147 40,857 n/a n/a 377,947 385,657
Comprehensive loss:
Net loss (year ended
December 31, 2000)............... (236,127) (213,114) n/a n/a (236,127) (213,114)
Total comprehensive loss (year
ended December 31, 2000)......... n/a n/a n/a n/a (241,982) (218,969)
Balances at December 31, 2000......... (202,980) (172,257) n/a n/a 8,025,240 8,055,963
Comprehensive loss:
Net loss (year ended
December 31, 2001)............... (635,658) (599,622) n/a n/a (635,658) (599,622)
Unrealized losses on marketable
securities (year ended
December 31, 2001)............... n/a n/a (7,022) (12,743) (7,022) (12,743)
Total comprehensive loss
(year ended December 31,
2001)........................ n/a n/a n/a n/a (643,169) (612,854)
Balances at December 31, 2001......... (838,638) (771,879) 24,101 18,380 7,490,100 7,551,138
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-21
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(2) Restatement (continued)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
As
As previously previously
As previously Restated Reported Restated Reported
Restated Reported Nine months Nine months Year Year
Year ended Year ended ended ended ended ended
December 31, December 31, December 31, December 31, March 31, March 31,
2001 2001 2000 2000 2000 2000
------------ ------------- ------------ ------------- --------- ----------
Cash flows from operating
activities:
Net (loss) income.................. $(635,658) $(599,622) $(236,127) $(213,114) $ 73,607 $ 81,317
Adjustment to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and
amortization.................. 942,060 962,722 n/a n/a n/a n/a
Deferred income taxes........... (185,996) (159,439) (110,829) (97,343) (146) 4,372
Investment write down........... 109,149 105,265 n/a n/a n/a n/a
Changes in operating assets and
liabilities, net of the effect of
acquisitions:
Receivables..................... (35,664) (94,578) 89,327 52,828 (45,460) (57,688)
Other assets.................... 9,898 9,560 n/a n/a n/a n/a
Accounts payable, accrued
expenses and other
liabilities................... (4,937) (5,056) n/a n/a n/a n/a
Deferred revenue................ (89,478) (109,478) n/a n/a n/a n/a
Cash flows from investing
activities:
Investments and acquisitions.... (38,019) (40,549) n/a n/a n/a n/a
Additions to intangible
assets........................ (56,145) (53,615) n/a n/a n/a n/a
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-22
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(3) Business Combinations
SkyMall Transaction
On July 18, 2001, the Company acquired all of the outstanding common stock
of SkyMall. Under the terms of the agreement, SkyMall's stockholders received
0.03759 shares of Gemstar common stock and $1.50 for each share of SkyMall
common stock outstanding. The unaudited consolidated financial statements
include the results of operations of SkyMall from July 18, 2001. SkyMall is a
specialty retailer that provides a large selection of premium-quality products
and services to consumers from a wide variety of merchants and partners.
Gemstar's principal reasons for the merger were as follows:
. T-commerce and e-commerce are major aspects of Gemstar's interactive TV
strategy. With the acquisition of SkyMall, Gemstar obtained back-office
infrastructure and fulfillment capacities to support and accelerate
Gemstar's t-commerce and e-commerce platforms.
. SkyMall's inventory model, which leverages the fulfillment infrastructure
of other merchants, represents a model on which Gemstar can build out and
expand its t-commerce and e-commerce strategies across its various media
properties.
. The acquisition of SkyMall affords Gemstar the opportunity to extend the
SkyMall brand and leverage its relationships with airlines and premium
merchants. Gemstar expects to leverage these relationships by extending
SkyMall's sales channels to Gemstar's portfolio of media properties.
. SkyMall's access to a majority of domestic airline seats provides Gemstar
with a captive audience with an upscale demographic--airline passengers.
Gemstar believes that SkyMall provides Gemstar with a unique opportunity
to expose this demographic to Gemstar's various media products, services
and platforms, including its Gemstar eBook offerings.
The aggregate purchase price of the SkyMall Transaction was $50.1 million,
which included cash of $22.2 million and approximately 741,000 shares of
Gemstar common stock issued to SkyMall stockholders at $36.58 per share, the
average price of the Company's common stock over the two-day period before and
after the SkyMall Transaction was agreed to and announced. The purchase price
also included $742,000, representing the fair value of unexercised SkyMall
options and warrants assumed by Gemstar and certain transaction costs.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-23
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(3) Business Combinations
SkyMall Transaction (continued)
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands). The
Company is in the process of finalizing the allocation of the purchase price,
which is subject to adjustment; however, the Company does not expect any
significant adjustments to the reported amounts as a result of the final
purchase price allocation. The preliminary purchase price allocation includes
$1.3 million in provisions for exit and separation costs, all of which are
included in liabilities at December 31, 2001. The Company expects the
provisions for exit and separation costs to be expended during 2002.
Assets
Current assets......... $ 8,464
Property and equipment. 7,207
Intangible assets...... 2,000
Other assets........... 23
Goodwill............... 68,174
-------
85,868
Liabilities:
Current liabilities.... 35,780
-------
Net purchase price........ $50,088
=======
The Company allocated $2.0 million of the purchase price to the fair value
of the acquired trade name. The trade name is considered an indefinite lived
intangible asset and is not subject to amortization.
The Company has not yet completed the allocation of $68.2 million of
goodwill to its reporting units in accordance with Statement 142. Goodwill
generated in this transaction is not subject to amortization in accordance with
Statement 142 and is not expected to be deductible for tax purposes.
TV Guide Transaction
On July 12, 2000, the Company acquired all of the outstanding common stock
of TV Guide by issuing 0.6573 shares of Gemstar common stock for each share of
TV Guide Class A and B common stock outstanding, or approximately 200 million
shares of Gemstar common stock. The TV Guide Transaction was accounted for as a
purchase. Accordingly, the unaudited consolidated financial statements include
the results of operations of TV Guide from July 12, 2000.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-24
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(3) Business Combinations
TV Guide Transaction (continued)
The purchase price for the TV Guide Transaction was $7.9 billion, consisting
of shares of Gemstar common stock issued to the TV Guide stockholders at $38.21
per share, the average market price of the Company's common stock for two days
before and after the agreement on the TV Guide Transaction was reached and
announced, and certain transaction costs.
The purchase price was allocated to identifiable tangible and intangible
assets and liabilities as follows, with the excess of the purchase price over
such identifiable assets and liabilities allocated to goodwill (in thousands).
Assets
Current assets.............. $ 449,997
Property and equipment...... 80,404
Intangible assets........... 9,904,892
Other assets................ 87,933
-----------
10,523,226
Liabilities:
Current liabilities......... 577,997
Deferred tax liability...... 1,393,940
Other long-term liabilities. 747,610
-----------
7,803,679
Unearned compensation.......... 88,011
-----------
Net purchase price............. $ 7,891,690
===========
Included in the purchase price allocation were $28.2 million in provisions
for contract termination and separation costs. As of December 31, 2001,
approximately $13.3 million ($10.0 million in contract termination costs and
$3.3 million in separation costs) had been charged against the allowance. The
Company expects that the remaining provisions for contract termination and
separation costs will be expended during 2002.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-25
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(3) Business Combinations
TV Guide Transaction (continued)
Intangible assets recorded as a result of the TV Guide Transaction are
comprised of the following amounts and lives (in thousands):
Customer lists........ $ 699,000 3-5 years
Contracts............. 1,942,000 5-10 years
Trademarks and patents 799,000 5-40 years
Publishing rights..... 270,000 15 years
Goodwill.............. 6,194,892 5-15 years
The following unaudited pro forma financial information reflects the
Company's results of operations for the year ended December 31, 2001 and the
nine months ended December 31, 2000 as though the TV Guide and SkyMall
transactions had been completed as of April 1, 2000 (in thousands, except per
share amounts):
Restated
Restated Nine months
Year ended ended
December 31, December 31,
2001 2000
------------ ------------
Revenues........................ $1,312,343 $1,042,988
Net loss........................ (636,150) (439,422)
Basic and diluted loss per share (1.54) (1.07)
Pooling Transactions
In January 2000, the Company completed mergers with two electronic-book
companies, NuvoMedia and SoftBook. Both mergers were accounted for under the
pooling of interests method and, accordingly, the unaudited consolidated
financial statements for periods prior to the mergers have been restated to
include the results of operations, financial position and cash flows of
NuvoMedia and SoftBook.
WGN Superstation Transaction (restated)
In April 2001, the Company sold the business that distributes the WGN
Superstation signal for approximately its net book value. Concurrent with this
transaction, the Company received a $100 million advertising commitment over a
six year period from the acquirer.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-26
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(4) Selected Balance Sheet Accounts
Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value of available-for-sale and held-to-maturity marketable
securities by major security type and class of security as of December 31, 2001
and 2000, were as follows (in thousands):
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
--------- ---------- ---------- --------
As of December 31, 2001:
Available-for-sale:
Corporate debt securities........................... $11,102 $ 9 $ -- $ 11,111
U.S. government securities.......................... 48,720 212 (63) 48,869
Equity securities................................... 13,382 18,766 (42) 32,106
------- ------- ------- --------
$73,204 $18,987 $ (105) $ 92,086
======= ======= ======= ========
Included in marketable securities...................... $42,129 $ 125 $ (42) $ 42,212
Included in marketable securities and other investments 31,075 18,862 (63) 49,874
------- ------- ------- --------
$73,204 $18,987 $ (105) $ 92,086
======= ======= ======= ========
As of December 31, 2000:
Available-for-sale:
Corporate debt securities........................... $14,334 $ 18 $ (1) $ 14,351
U.S. government securities.......................... 9,635 2 -- 9,637
Equity securities................................... 23,141 33,706 (9,356) 47,491
------- ------- ------- --------
$47,110 $33,726 $(9,357) $ 71,479
======= ======= ======= ========
Held-to-maturity:
Corporate debt securities........................... $18,550 $ 17 $ (1) $ 18,566
U.S. government securities.......................... 25,090 14 (31) 25,073
------- ------- ------- --------
$43,640 $ 31 $ (32) $ 43,639
======= ======= ======= ========
Included in marketable securities...................... $63,407 $ 51 $ (33) $ 63,425
Included in marketable securities and other investments 27,343 33,706 (9,356) 51,693
------- ------- ------- --------
$90,750 $33,757 $(9,389) $115,118
======= ======= ======= ========
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-27
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(4) Selected Balance Sheet Accounts
Marketable Securities (continued)
As of December 31, 2001, available-for-sale debt securities with an
amortized cost and fair value of $19.8 million were due in one to two years.
All remaining debt securities as of December 31, 2001 were due within one year.
Marketable securities are reviewed each reporting period for declines
considered other-than-temporary and, if appropriate, written down to their
estimated fair value. During the year ended December 31, 2001, the Company
wrote down the carrying value of certain of its available-for-sale equity
securities by $9.9 million as the decline in the fair value of the securities
(determined by reference to prices on quoted stock exchanges) was deemed to be
other than temporary.
Receivables
Receivables consist of the following (in thousands):
Restated Restated
December 31, December 31,
2001 2000
------------ ------------
Receivables.................... $317,353 $277,191
Allowance for doubtful accounts (32,277) (26,646)
-------- --------
Receivables, net............... $285,076 $250,545
======== ========
The provision for doubtful accounts amounted to approximately $17.1 million,
$12.1 million and $2.6 million for the year ended December 31, 2001, the nine
months ended December 31, 2000 and the year ended March 31, 2000, respectively,
and is included in operating expenses, excluding stock compensation,
depreciation and amortization, impairment of goodwill and nonrecurring expenses.
At December 31, 2001, approximately $112.9 million, or 40%, of the Company's
receivables (restated) are due from five entities. The Company currently
believes these receivables to be realizable; however, events may occur in the
future which could cause the Company to change its assessment of the amount of
recoverability.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-28
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(4) Selected Balance Sheet Accounts (continued)
Property and Equipment
Property and equipment, at cost, consist of the following (in thousands):
December 31, December 31,
2001 2000
------------ ------------
Machinery and equipment....................... $117,949 $ 95,459
Leased transponders........................... 7,554 9,092
Buildings and improvements.................... 16,511 13,669
-------- --------
142,014 118,220
Less accumulated depreciation and amortization (54,064) (25,838)
-------- --------
Property and equipment, net................... $ 87,950 $ 92,382
======== ========
Depreciation expense was $26.5 million, $13.2 million and $2.3 million for
the year ended December 31, 2001, the nine months ended December 31, 2000 and
the year ended March 31, 2000, respectively. Amortization of certain property
and equipment was $3.5 million, $2.9 million and $150,000 for those same
respective periods.
Intangible Assets
Intangible assets consist of the following (in thousands):
Restated
December 31, December 31,
2001 2000
------------ ------------
Goodwill..................... $ 6,171,149 $6,207,020
Contracts.................... 1,932,000 1,942,000
Patents and trademarks....... 898,050 839,643
Customer lists............... 699,000 699,000
Publishing rights............ 270,000 270,000
----------- ----------
9,970,199 9,957,663
Less accumulated amortization (1,348,464) (440,899)
----------- ----------
Intangible assets, net....... $ 8,621,735 $9,516,764
=========== ==========
Amortization expense was $912.1 million (restated), $427.3 million and $3.4
million for the year ended December 31, 2001, the nine months ended December
31, 2000 and the year ended March 31, 2000, respectively.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-29
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(4) Selected Balance Sheet Accounts (continued)
Intangible Assets (continued)
Capitalized patent prosecution and litigation costs are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
value of the Company's capitalized patent prosecution and litigation costs may
not be recoverable. A primary factor the Company considers that could trigger
an impairment review is whether the Company can successfully protect and defend
its patents. As of December 31, 2001 and 2000, capitalized patent prosecution
and litigation costs, net of accumulated amortization, were $62.2 million and
$23.3 million, respectively, of which $34.6 million is related to one patent
litigation case which is in progress. During the year ended December 31, 2001,
the nine months ended December 31, 2000 and the year ended March 31, 2000, the
Company capitalized patent prosecution and litigation costs of $47.6 million,
$9.3 million and $4.5 million, respectively. The Company currently believes
these amounts to be recoverable, however events may occur in the future which
could cause the Company to change its assessment of recoverability.
Investments
The Company had investments in equity instruments of privately held and
public companies which amounted to $60.4 million and $152.9 million as of
December 31, 2001 and 2000, respectively. These investments are accounted for
using either the cost or equity method and consist of common stock, preferred
stock and warrants for common stock.
The Company determines the fair value for common stock and preferred stock
equity investments based on amounts paid by independent third parties in the
investees' most recent capital transactions. The fair value of common stock
warrants received is determined using the Black-Scholes option pricing model.
The fair value of warrant investments in companies approximated their carrying
value at December 31, 2001. These investments are reviewed each reporting
period for declines considered other-than-temporary, and, if appropriate,
written down to their estimated fair value.
During the year ended December 31, 2001, the Company determined that certain
of the Company's technology investments, many of which were acquired as part of
the TV Guide merger and were recorded at fair values that existed for
technology investments at that time, declined in value that was considered to
be other-than-temporary primarily as a result of the continuing economic
slowdown, particularly in the technology sector. An impairment review is
performed whenever events or changes in circumstances indicate the carrying
value of the Company's investments may not be recoverable. Factors the Company
considers important which could trigger an impairment review include, but are
not limited to, significant underperformance relative to historical or expected
operating results of the Company's investees, significant changes in the manner
of use of the acquired assets or the strategy for the Company's overall
business and significant negative industry or economic trends.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-30
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(4) Selected Balance Sheet Accounts (continued)
Investments (continued)
The Company determined that the carrying value of certain investments had a
decline that was other than temporary based upon the existence of one or more
indicators of impairment. The impairment charge reduced the investments to an
estimated fair value consistent with the general economic environment within
the technology sector resulting in a charge of $99.2 million (restated), which
is included in other (expense) income, net.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
Restated
December 31, December 31,
2001 2000
------------ ------------
Accounts payable.............................. $ 80,250 $ 44,192
Accrued liabilities:
Marketing expenses......................... 38,266 17,291
Acquisition related reserves............... 16,187 28,200
Other...................................... 151,058 131,712
-------- --------
Total accounts payable and accrued liabilities $285,761 $221,395
======== ========
Deferred Revenue
The Company receives upfront payments for license fees from manufacturers
who incorporate the Company's patented proprietary technologies and for
advertising. In addition, certain of the Company's customers that subscribe to
the Company's magazine and programming services prepay subscription fees for
periods of up to one year. Prepayment amounts which have not yet been
recognized as revenues under the Company's accounting policies are recorded as
deferred revenues.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-31
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(4) Selected Balance Sheet Accounts (continued)
Deferred Revenue (continued)
Deferred revenue consists of the following (in thousands):
Restated
December 31, December 31,
2001 2000
------------ ------------
Licensing fees........... $ 77,690 $128,467
Magazine subscriptions... 200,088 208,366
Programming subscriptions 76,718 77,536
Other.................... 16,431 19,131
-------- --------
Total deferred revenue... 370,927 433,500
Less current portion..... 261,420 233,283
-------- --------
$109,507 $200,217
======== ========
(5) Credit Arrangements
The Company's wholly owned subsidiary, TV Guide, has a $300 million six-year
revolving credit facility and a $300 million four-year amortizing term loan,
both expiring in February, 2005 with a group of banks. Borrowings under the
credit facilities bear interest (2.9% at December 31, 2001) either at the
banks' prime rate or LIBOR, both plus a margin based on a sliding scale tied to
TV Guide's leverage ratio, as defined in the facility. The credit facilities
are guaranteed by certain subsidiaries of TV Guide and the stock of TV Guide's
subsidiaries is pledged as collateral. The credit facilities impose
restrictions on TV Guide's ability to pay dividends to the Company tied to TV
Guide's leverage ratio. This restriction does not apply to the Company's
ability to pay dividends. As of December 31, 2001, TV Guide had available
borrowing capacity under the six-year revolving credit facility of $146.6
million. Principal payments of $60 million in 2002, $90 million in 2003 and $23
million in 2004 are due under the $300 million amortizing term loan.
Outstanding borrowings under both credit facilities at December 31, 2001 and
2000 were $326.4 million and $568.7 million, respectively.
On September 15, 2000, TV Guide repurchased for cash $328.6 million of its
outstanding $400 million in 8 1/8% senior subordinated notes at 101% of the
principal amount of the notes plus accrued interest. The offer to repurchase
the notes was required pursuant to the terms of the indenture governing the
notes as a result of the change in control of TV Guide by reason of its
acquisition by Gemstar. The repurchase was funded through a combination of
available cash and borrowings under the bank credit facilities.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-32
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(5) Credit Arrangements (continued)
On June 18, 2001, the Company completed a tender offer in which it acquired
substantially all of the remaining outstanding 8 1/8% senior subordinated notes
of TV Guide at a price of $1,045 per $1,000 principal amount of notes tendered
for an aggregate purchase price of $71.1 million plus accrued interest. In
connection with the tender offer, the indenture for the notes was amended to
delete or modify most of the restrictive covenants. An extraordinary loss of
$2.1 million, net of tax, was recognized as a result of this transaction.
The Company is a party to a loan guaranty to assist a printing services
supplier in obtaining a line of credit and term loans with a bank. The maximum
exposure to the Company created by this guaranty is $10.0 million. (restated)
(6) Leases
The Company leases operating and office premises and satellite transponders.
The terms of certain of the agreements provide for an option to cancel the
agreements after a period of time, subject to cancellation charges and/or
meeting certain conditions. One satellite transponder is under a long-term
lease arrangement that is accounted for as a capital lease. The remainder of
the satellite transponder leases are accounted for as operating leases.
Future minimum lease payments under capital and noncancelable operating
leases at December 31, 2001 are as follows (in thousands):
Capital Operating
Leases Leases
------- ---------
Year ending December 31:
2002................................ $ 2,400 $25,756
2003................................ 2,400 18,288
2004................................ 2,000 14,121
2005................................ -- 8,703
2006................................ -- 4,496
Thereafter.......................... -- 12,855
------- -------
Total future minimum lease payments.... 6,800 84,219
Less amount representing interest at 7% (486) --
Less sublease revenues................. -- (2,339)
------- -------
Net future minimum lease payments...... 6,314 $81,880
=======
Less current portion................... (2,021)
-------
$ 4,293
=======
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-33
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(6) Leases (continued)
Rent expense, net of sublease revenues, under operating leases was $29.8
million, $16.4 million and $2.5 million for the year ended December 31, 2001,
the nine months ended December 31, 2000 and the year ended March 31, 2000,
respectively.
(7) Income Taxes
The Company's income (loss) before income taxes and extraordinary item for
the year ended December 31, 2001, the nine months ended December 31, 2000 and
the year ended March 31, 2000 consisted of the following components (in
thousands):
Restated
Restated Nine months Restated
Year ended ended Year ended
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ----------
Domestic $(828,219) $(358,768) $ 56,194
Foreign. 62,190 93,071 56,191
--------- --------- --------
$(766,029) $(265,697) $112,385
========= ========= ========
The provision (benefit) for income taxes consists of the following (in
thousands):
Restated Restated
Restated Nine months Year
Year ended ended ended
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ---------
Current:
Federal. $ 44,066 $ 71,323 $28,940
State... 3,288 3,974 4,134
Foreign. 6,171 5,962 5,850
--------- --------- -------
53,525 81,259 38,924
Deferred:
Federal. (176,181) (104,980) (455)
State... (9,815) (5,849) 309
--------- --------- -------
(185,996) (110,829) (146)
--------- --------- -------
Total...... $(132,471) $ (29,570) $38,778
========= ========= =======
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-34
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(7) Income Taxes (continued)
A reconciliation of the expected income tax provision (benefit) using the
U.S. statutory rate of 35 percent to the provision (benefit) for income taxes
is as follows ( in thousands):
Restated Restated
Restated Nine months Year
Year ended ended ended
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ---------
Expected income tax expense (benefit) $(268,110) $(92,993) $39,335
State taxes, net of federal effect... (7,011) (1,814) 2,787
Nondeductible amortization........... 154,068 72,158 --
Foreign tax impact................... 3,068 (13,049) (2,272)
Change in valuation allowance........ (14,199) 982 (4,491)
Other................................ (287) 5,146 3,419
--------- -------- -------
Total................................ $(132,471) $(29,570) $38,778
========= ======== =======
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-35
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(7) Income Taxes (continued)
Deferred taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial
statements. The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities are presented below
(in thousands):
Restated Restated
December 31, December 31,
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards................... $ 57,692 $ 65,719
Write down of investments and other assets......... 51,649 --
Unrealized losses on marketable securities......... 11,175 5,132
Expense items...................................... 27,540 1,141
Other.............................................. 4,685 --
Deferred revenue................................... 13,264 41,811
----------- -----------
Gross deferred tax assets............................. 166,005 113,803
Valuation allowance................................... (65,514) (65,719)
----------- -----------
Net deferred tax assets............................... 100,491 48,084
----------- -----------
Deferred tax liabilities:
Tax versus financial depreciation and amortization. (1,127,460) (1,326,869)
Tax liability provided on intercompany income...... (44,798) (62,328)
Other.............................................. -- (564)
----------- -----------
Gross deferred tax liabilities........................ (1,172,258) (1,389,761)
----------- -----------
Net deferred tax liability............................ $(1,071,767) $(1,341,677)
=========== ===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income in specific tax
jurisdictions during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections of future taxable income over the periods which the deferred tax
assets are deductible, management has concluded that it is more likely than not
that the Company will realize the benefits of these deductible differences at
December 31, 2001, net of the valuation allowance established.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-36
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(7) Income Taxes (continued)
As of December 31, 2001, the Company had available net operating loss
carryforwards aggregating approximately $156 million to offset future United
States income taxes expiring through fiscal year 2020. As a result of previous
transactions which involved an ownership change as defined in the applicable
section of the Internal Revenue Code, the Company will be subject to
limitations on the use of its net operating loss carryforwards. Accordingly,
there can be no assurance that a significant amount of the existing net
operating loss carryforwards will ultimately be utilized by the Company.
(8) Stock Option Plans
In connection with various acquisitions, the Company has assumed four stock
option plans. These assumed stock option plans along with the Company's stock
option plan are collectively referred to as "the Plans". The Company's
Compensation Committee may grant stock options to purchase common stock of the
Company to employees of the Company (including executive officers) and certain
other persons (including directors and consultants) who are eligible to
participate in the Plans. Subject to early termination or acceleration
provisions, a stock option generally will be exercisable, in whole or in part,
from the date specified in the related award agreement until the expiration
date determined by the Compensation Committee. In no event, however, is a stock
option exercisable after ten years from its date of grant.
The Plans allow for the issuance of stock options to purchase a maximum of
118 million shares of the Company's Common Stock. As of December 31, 2001,
there were 36.6 million shares available for future option grants under the
Plans.
The following table summarizes information about stock option transactions
(shares in thousands):
Year ended Nine months ended Year ended
December 31, 2001 December 31, 2000 March 31, 2000
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
Outstanding at beginning of period.. 59,885 $ 12.86 49,933 $ 7.98 50,097 $ 5.57
Granted............................. 3,426 38.54 5,990 44.19 4,835 29.86
Exercised........................... (3,382) 6.05 (2,651) 8.46 (4,164) 4.79
Cancelled........................... (553) 34.59 (415) 21.26 (835) 6.10
Assumed options..................... 7 187.73 7,028 19.71 -- --
------ ------ ------
Outstanding at end of period........ 59,383 14.55 59,885 12.86 49,933 7.98
====== ====== ======
Options exercisable at end of period 36,048 6.96 31,951 5.48 26,170 4.72
====== ====== ======
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-37
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(8) Stock Option Plans (continued)
The following table summarizes information about the Company's stock options
outstanding as of December 31, 2001 (shares in thousands):
Stock Options
Stock Options Outstanding Exercisable
------------------------------- -------------------
Weighted-
Average
Remaining Weighted- Weighted-
Years of Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices of Shares Life Price of Shares Price
------------------------ --------- ----------- --------- --------- ---------
$0.18-$5.00........ 13,514 3.8 $ 3.16 13,469 $ 3.16
$5.01-$10.00....... 23,461 6.0 6.08 18,366 6.05
$10.01-$15.00...... 5,301 6.4 10.99 1,677 11.79
$15.01-$30.00...... 2,140 7.3 21.73 975 21.33
$30.01-$45.00...... 11,232 8.2 35.01 1,422 33.61
$45.01-$314.25..... 3,735 8.4 48.43 139 63.30
------ ------
Total........... 59,383 6.2 14.55 36,048 6.96
====== ======
The per share weighted-average fair value of stock options granted during
the year ended December 31, 2001, the nine months ended December 31, 2000 and
the year ended March 31, 2000, was $31.04, $34.22 and $23.93, respectively. The
fair value of each option was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Nine months Year
Year ended ended ended
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ---------
Risk-free interest rate 5.2% 6.2% 5.8%
Volatility............. 76% 71% 73%
Expected life (years).. 9.4 8.7 8.9
Expected dividend yield -- % -- % -- %
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-38
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(8) Stock Option Plans (continued)
The Company applies APB Opinion No. 25, and related interpretations, in
accounting for its Plans. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been changed to the pro forma amounts
indicated below (in thousands, except per share data):
Restated Restated
Restated Nine months Year
Year ended ended ended
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ---------
Net (loss) income:
As reported.................... $(635,658) $(236,127) $73,607
Pro forma...................... (700,945) (283,391) 33,382
Basic (loss) earnings per share:
As reported.................... (1.54) (0.71) 0.36
Pro forma...................... (1.70) (0.85) 0.16
Diluted (loss) earnings per share:
As reported.................... (1.54) (0.71) 0.30
Pro forma...................... (1.70) (0.85) 0.13
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not likely to be representative of pro forma
effects on reported net income (loss) for future years.
(9) Warrants
In connection with the acquisition of SkyMall, the Company has reserved
90,402 shares of the Company's common stock for issuance upon the exercise of
outstanding warrants to acquire SkyMall common stock. Valued using the
Black-Scholes option pricing model at $671,000 at the date of acquisition, the
outstanding warrants are exercisable at prices ranging from $53 to $383 and
expire at various dates through June 2005. As of December 31, 2001, none of
these warrants have been exercised.
(10) Stock Repurchase Program
On September 19, 2001, the Company's board of directors authorized the
repurchase of up to $300 million of the Company's common stock. As of December
31, 2001, the Company has repurchased 330,000 shares for approximately $6.4
million under the stock repurchase program. Shares repurchased under the stock
repurchase program are included in treasury stock on the accompanying
consolidated balance sheets.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-39
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(11) Employee Benefit Plans
The Company has defined contribution plans which provide most of its
employees with the ability to defer a percentage of their annual compensation
subject to certain limitations. The Company will match the employee's deferrals
based on certain percentages of the employee's deferrals. The Company made
contributions of $3.3 million, $1.7 million and $79,000 to these plans during
the year ended December 31, 2001, the nine months ended December 31, 2000 and
the year ended March 31, 2000, respectively.
(12) Legal Proceedings
On December 1, 1998, the Company filed a patent infringement action against
Pioneer Electronic Corp., Pioneer North America, Inc. and Pioneer New Media
Technologies, Inc. (collectively "Pioneer") in the U.S. District Court for the
Central District of California. The suit seeks damages and injunctive relief
based upon the alleged infringement of two patents by Pioneer's interactive
program guide. Pioneer alleges the Company violated federal antitrust laws and
misused certain patents.
On December 3, 1998, Scientific-Atlanta, Inc. ("SA") filed an action against
the Company in the U.S. District Court for the Northern District of Georgia.
The action alleges the Company violated federal antitrust laws and misused its
patents. SA seeks damages, injunctive relief and a declaration that certain
patents are unenforceable, not infringed or invalid.
On December 4, 1998, the Company filed a patent infringement action against
SA in the U.S. District Court for the Central District of California. The suit
seeks damages and injunctive relief based upon the alleged infringement of two
patents by SA's interactive program guide.
On April 23, 1999, SA filed an action against the Company in the U.S.
District Court for the Northern District of Georgia, alleging infringement of
three patents and seeking damages and injunctive relief. This case has been
coordinated for pretrial purposes with the July 23, 1999 action described below
filed by SA against StarSight Telecast, Inc. ("StarSight"), a wholly owned
subsidiary of the Company. The parties are in pretrial proceedings.
On April 26, 1999, the Judicial Panel on Multi-District Litigation ordered
that the Pioneer and SA federal lawsuits noted above which were pending outside
the Northern District of Georgia be transferred to the Northern District of
Georgia for coordinated or consolidated pretrial proceedings with the December
3, 1998 action pending in that district (the "MDL Transfer Order").
On June 25, 1999, SA filed an action against StarSight in the U.S. District
Court for the Northern District of Georgia, seeking a declaratory judgment of
invalidity and non-infringement of two patents. On August 2, 1999,
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-40
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(12) Legal Proceedings (continued)
StarSight answered the complaint as to one of the patents and counterclaimed
against SA for infringement of this patent, seeking damages and injunctive
relief. On September 18, 2001, the Court allowed StarSight to amend its answer
to assert an additional counterclaim against SA for infringement of the other
patent at issue. The parties are in pretrial proceedings.
On July 23, 1999, SA filed an action against StarSight in the U.S. District
Court for the Northern District of Georgia, alleging infringement of three
patents and seeking damages and injunctive relief. This case has been
coordinated for pretrial purposes with the action filed by SA against the
Company on April 23, 1999, and the parties are in pretrial proceedings.
On January 18, 2000, StarSight filed a patent infringement action against
TiVo Inc. ("TiVo") in the U.S. District Court for the Northern District of
California. The suit claims, among other matters, that TiVo willfully infringed
certain StarSight intellectual property by virtue of TiVo's deployment,
marketing, offers to sell and sale of personalized video recorder devices
containing an unlicensed interactive program guide. StarSight is seeking an
injunction and monetary damages. On February 25, 2000, TiVo answered
StarSight's Complaint, and also filed counterclaims against the Company and
StarSight alleging, among others, that the Company has violated federal
antitrust law and the California unfair business practices act. In its
counterclaims, TiVo seeks, among other relief, damages and an injunction. The
parties are in pretrial proceedings.
On October 23, 2000, StarSight filed a patent infringement suit against
EchoStar Communications Corp., EchoStar Satellite Corp. and EchoStar
Technologies Corp. (collectively "EchoStar") in the United States District
Court for the Western District of North Carolina. The suit claims, among other
matters, that EchoStar willfully infringed certain StarSight intellectual
property by virtue of EchoStar's deployment, marketing, offers to sell and sale
of direct broadcast satellite receivers containing an unlicensed interactive
program guide and by EchoStar's operation of transmission systems to such
receivers. StarSight, among other relief, is seeking an injunction and monetary
damages. This lawsuit has now been stayed pending completion of the ITC
proceedings discussed below.
On November 17, 2000, Pioneer Digital Technologies, Inc. filed suit against
the Company and various of its subsidiaries in Los Angeles County Superior
Court. On January 12, 2001, Pioneer Digital Technologies filed its first
amended complaint which claims, among other matters, that the Company and
certain of its subsidiaries have violated state antitrust and unfair
competition laws. Pioneer Digital Technologies is seeking damages and
injunctive relief against the Company. The parties are in pretrial proceedings.
On December 5, 2000, EchoStar filed an antitrust action against the Company
and several of its subsidiaries in the U.S. District Court for the District of
Colorado. The action alleges the Company and several of its
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-41
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(12) Legal Proceedings (continued)
subsidiaries violated federal and state antitrust laws. EchoStar seeks, among
other relief, damages and an injunction. On September 17, 2001, the MDL Panel
affirmed its Conditional Transfer Order transferring the case to U.S. District
Court for the Northern District of Georgia. This case is now being coordinated
with the actions subject to the MDL Transfer Order. The parties are in pretrial
proceedings.
On December 29, 2000, Gemstar International Group, Ltd., Barnes & Noble,
Inc. and Thomson Consumer Electronics were named as defendants in an action for
patent infringement by Jennifer Landau, an individual, that relates to e-book
technology. The Company was served with this action in May 2001. This action,
captioned Jennifer Landau v. Barnes & Noble, et al., USDC Case No. C-00-593-B,
is pending in the U.S. District Court for the District of New Hampshire.
Gemstar and Barnes & Noble have now responded to plaintiff's complaint, and the
parties are in pretrial proceedings.
On February 9, 2001, the Company and StarSight Telecast, Inc., filed four
separate patent infringement actions against: (1) Scientific-Atlanta, Inc.; (2)
Pioneer Corporation, Pioneer Digital Technologies, Inc., Pioneer North America,
Inc. and Pioneer New Media Technologies, Inc.; (3) SCI Systems, Inc.; and (4)
EchoStar Communications Corporation in the U.S. District Court for the Northern
District of Georgia. Each of these actions has been stayed by the Court pending
completion of the ITC proceedings discussed immediately below.
On February 14, 2001, the Company and StarSight Telecast, Inc. filed a
complaint requesting that the United States International Trade Commission
("ITC") commence an investigation pursuant to Section 337 of the Tariff Act of
1930, as amended, 19 U.S.C. Section 1337 ("Section 337"), regarding imports of
certain set-top boxes and components thereof. The complaint alleges that
Pioneer Corporation, Pioneer Digital Technologies, Inc., Pioneer North America,
Inc., Pioneer New Media Technologies, Inc., Scientific-Atlanta, Inc., EchoStar
Communications Corporation and SCI Systems, Inc. (collectively "Respondents"),
are violating Section 337 by their unlawful importation into the United States,
sale for importation into the United States, and/or sale in the United States
after importation, of set-top boxes and/or components that infringe, directly,
contributorily or by inducement, of certain patents owned by the Company. The
complaint requests an order excluding from entry into the United States all
imported set-top boxes and components that infringe, directly, contributorily
or by inducement, any claims of the patents in suit, and directing Respondents
to cease and desist from importing, marketing, advertising, demonstrating,
warehousing, distributing, selling and/or using set-top boxes or components
that so infringe. On or about March 16, 2001, the ITC instituted the requested
investigation referred to as "In the Matter of Certain Set-Top Boxes and
Components Thereof, Investigation No. 337-TA-454 (ITC)". An administrative
hearing was held during December 2001, and the parties are now awaiting a
decision from the Administrative Law Judge.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-42
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(12) Legal Proceedings (continued)
On March 23, 2001, Gemstar Development Corporation, a wholly owned
subsidiary of the Company, was added as a third-party defendant in the lawsuit
of SuperGuide Corporation v. DirecTV Enterprises, Inc., et al., which is
currently pending in the U.S. District Court for the Western District of North
Carolina. The original claims brought by SuperGuide Corporation against the
defendants in this lawsuit are for patent infringement with respect to three
patents (the "SuperGuide Patents"). In 1993, Gemstar Development Corporation
received a license to the SuperGuide Patents from SuperGuide Corporation within
certain defined fields of use. Defendants asked the Court to join Gemstar
Development Corporation to these proceedings as a necessary party. After it was
added as a party, Gemstar Development Corporation brought claims for
declaratory relief and breach of contract against SuperGuide in this lawsuit
relating to the 1993 license agreement between SuperGuide and Gemstar
Development Corporation. In addition, Gemstar Development Corporation has
asserted claims against EchoStar for infringing the SuperGuide Patents within
Gemstar's defined fields of use. The parties are now in pretrial proceedings.
On November 2, 2001, Thomson multimedia, Inc. sought leave to add the
Company and certain subsidiaries into a case captioned Pegasus Development
Corporation and Personalized Media Communications, L.L.C. v. DirecTV, Inc.,
Hughes Electronics Corporation, Thomson Consumer Electronics, Inc. and Philips
Electronics North America Corporation; Thomson Multimedia, Inc. v. Pegasus
Development Corporation, Personalized Media Communications, L.L.C., TVG-PMC,
Inc., StarSight Telecast, Inc., and Gemstar-TV Guide International, Inc.,
United States District Court for the District of Delaware, Case No. 00-1020
(GMS). At that time, Thomson asserted a declaratory judgment claim against the
Gemstar parties seeking a declaration of noninfringement and invalidity of
certain patents as to which the Company is a licensee. In addition to its claim
for declaratory relief (discussed above), Thomson has now also added a claim
for antitrust violations under federal and state law. On February 1, 2002, the
Gemstar parties filed a motion to dismiss Thomson's claims. At the same time,
the Gemstar parties filed a motion, in the alternative, to bifurcate or sever
Thomson's antitrust claims. The Court has yet to rule on either of these
motions.
On November 30, 2001, Thomson multimedia, Inc. ("Thomson, Inc.") initiated
an arbitration with the American Arbitration Association against the Company.
The Statement of Claims filed by Thomson, Inc. alleges that the Company has
breached certain obligations under a group of agreements signed by the parties
as of December 31, 1999 relating to a joint venture between the parties for
revenue sharing of advertising on electronic programming guides. On January 7,
2002, the Company filed an Answering Statement and Counterclaim, inter alia,
denying all allegations of the claims filed by Thomson, Inc. and the Company,
in addition, asserted counterclaims against Thomson, Inc. and Thomson
multimedia, S.A. ("Thomson S.A.") alleging, inter alia, that Thomson S.A. had
breached certain of its obligations under one of the agreements signed by the
parties as of December 31, 1999 relating to the introduction of electronic
programming guides in Europe.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-43
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(12) Legal Proceedings (continued)
On October 18, 1999, a former employee of ODS Technologies, L.P. ("ODS"),
now a majority owned subsidiary of the Company, filed a complaint against ODS
and TV Guide in a Florida federal court, which complaint was amended on
November 12, 1999, asserting causes of action for violations of certain federal
statutes governing pension plans and for equitable estoppel. The amended
complaint seeks an unspecified amount of damages for benefits allegedly due to
the plaintiff under his employment agreement with ODS. ODS currently has
pending a motion for summary judgment to dismiss the lawsuit and the time set
by the Court to complete discovery now has expired. Plaintiff has moved to
re-open discovery, which motion the Company has opposed. On November 1, 2001
the Court heard argument on the motion for summary judgment and has taken it
under advisement.
On May 3, 2000, a complaint was filed in the U.S. District Court for the
Southern District of New York against Murdoch Magazines Distribution, Inc. (now
named TV Guide Distribution, Inc. and a wholly owned subsidiary of the Company)
and other parties by United Magazine Company, Inc. ("Unimag") and related
entities. The complaint alleges claims against Murdoch Magazines for violation
of the Robinson-Patman Act, breach of implied covenants of good faith and fair
dealing, promissory estoppel, breach of fiduciary duty, misappropriation of
business property and trade secrets, tortuous destruction of business, breach
of confidential relationship and violation of federal and state antitrust laws.
The complaint seeks monetary damages, plus treble and punitive damages,
attorneys' fees and costs. On August 31, 2000, Unimag filed an amended
complaint, (i) adding TV Guide Distribution, Inc. as a named defendant, (ii)
adding six other national distributors as defendants, and (iii) adding claims
for unjust enrichment and violation of the New York Franchise Sales Act. The
Company filed a motion to dismiss all of the claims asserted against it. On May
1, 2001, the Court heard oral argument on the Company's motion to dismiss, and
an Opinion and Order was issued on May 31, 2001, dismissing all fifteen counts
in Unimag's Amended Complaint, most with prejudice and some with leave to
replead. On June 21, 2001, Unimag and the other plaintiffs filed a Second
Amended Complaint, in essence alleging violations of the Robinson-Patman Act,
breach of fiduciary duties and confidential relationships by the national
distributor defendants and Murdoch Magazines, along with tort and statutory
claims. All defendants, including Murdoch Magazines, have filed motions to
dismiss portions of the Second Amended Complaint. By Opinion and Order dated
December 17, 2001, the Court granted the motions in part and denied them in
part. The claims for breach of fiduciary duties and confidential relationships
against the national distributor defendants and Murdoch Magazines were
dismissed with prejudice. The Robinson-Patman claims remain, along with certain
statutory claims. The parties have met to discuss discovery as the case
proceeds on the remaining issues.
During July and August 2000, TV Guide was served with more than 20 class
action complaints filed primarily in the U.S. District Court for the Southern
District of New York on behalf of magazine subscribers. These complaints, which
have been consolidated into a single action, allege that TV Guide, the Magazine
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-44
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(12) Legal Proceedings (continued)
Publishers Association ("MPA"), and 12 other publishers of consumer magazines
have violated federal antitrust laws by conspiring to limit the discounting of
magazine subscription prices by means of rules adopted by the MPA and the Audit
Bureau of Circulation. The plaintiffs seek injunctive relief, unspecified
damages (trebled), and attorneys' fees and costs. Plaintiffs have filed a
motion for partial summary judgment which is pending before the Court. After
oral argument was heard on January 10, 2001, the parties entered into
settlement discussions. The Court was notified by letter dated June 19, 2001,
that the parties were engaged in settlement discussions. Settlement
negotiations are continuing.
The Company is also a party to certain other claims, actions and proceedings
incidental to its business, none of which is expected to have a material
adverse effect on the business, financial position or results of operations of
the Company.
(13) Related Party Transactions and Other Significant Relationships
In connection with the acquisition of TV Guide in 2000, The News Corporation
Limited ("News Corp.") became a stockholder of the Company. As of December 31,
2001, News Corp. directly and indirectly owns approximately 42% of the
Company's outstanding common stock and has the right to designate six directors
on the Company's board. The Company earned advertising revenues of $19.3
million and $10.4 million for the year ended December 31, 2001 and the period
from the date of the TV Guide acquisition through December 31, 2000,
respectively, from entities controlled by News Corp. During those same periods,
the Company acquired programming from News Corp. controlled entities of $11.3
million and $7.8 million, respectively. Prior to its acquisition of TV Guide,
the Company did not have any significant transactions with News Corp. As of
December 31, 2001 and 2000, the Company had receivables due from News Corp.
controlled entities totaling $4.6 million and $9.5 million, respectively, and
payables due to News Corp. controlled entities totaling $302,000 and $965,000,
respectively. In addition, the Company purchases paper through a paper
procurement arrangement with News Corp. at negotiated prices with paper
suppliers based on the combined paper requirements of the two organizations.
Liberty Media Corporation ("Liberty Media"), formerly an indirect wholly
owned subsidiary of AT&T Corp., directly or indirectly owned approximately 21%
of the issued and outstanding common stock of the Company from the date of the
acquisition of TV Guide in 2000 until May 2, 2001, the date Liberty Media sold
its interest in the Company to News Corp. For the period January 1, 2001 to May
2, 2001, the date Liberty Media ceased to be considered a related party of the
Company, and the period from the date of the TV Guide acquisition through
December 31, 2000, the Company purchased programming from Liberty Media
controlled affiliates of $4.5 million and $7.4 million, respectively. During
those same periods, the Company also sold video, program
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-45
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(13) Related Party Transactions and Other Significant Relationships (continued)
promotion and guide services and subscriber management services to AT&T
Broadband and Internet Services ("BIS") and its consolidated affiliates of $6.7
million and $8.4 million, respectively. In addition, during those same periods,
the Company purchased production services and was provided satellite
transponder facilities and uplink services from BIS consolidated affiliates of
$2.4 million and $3.9 million, respectively. BIS is also wholly owned by AT&T
Corp. Prior to its acquisition of TV Guide, the Company did not have any
significant transactions with Liberty Media or BIS.
The Company has included in the amounts discussed above, transactions with
News Corp., BIS, and Liberty Media and all entities in which BIS, Liberty Media
and News Corp. have an interest greater than 50%. In addition, the Company has
transactions with entities in which BIS, Liberty Media and News Corp. own,
directly or indirectly, 50% or less.
The Company has multiple transactions with Thomson multimedia, Inc.,
including Thomson's licensing of the Company's VCR Plus+, GUIDE Plus+ and eBook
technologies, Thomson's advertising on the Company's platforms, primarily the
interactive program guide platforms, the Company's participation in marketing
and promotion campaigns on Thomson products carrying the Company's technology,
and the two companies being joint venture partners in the sale of advertising
and electronic program guides on televisions. During the year ended December
31, 2001, revenues earned from the relationship with Thomson were $76.2 million
and expenses incurred were $34.6 million. Of the revenue earned from Thomson in
this period, $10.1 million was recognized as IPG advertising revenue in the
Interactive Platform Sector. As of December 31, 2001, the Company has
receivables due from and a payable due to Thomson totaling $53.2 million and
$36.5 million, respectively.
(14) Segment and Geographical Information
The Company organizes its businesses into three groups which also represent
its reportable business segments: the Technology and Licensing Sector, which is
responsible for the development, licensing and protection of intellectual
property and proprietary technologies (the Company's technologies include the
interactive program guides ("IPG") marketed under the GUIDE Plus+ and TV Guide
Interactive brands, the VCR Plus+ system and the electronic book ("eBook"));
the Interactive Platform Sector, which derives recurring income from
advertising, interactive services and e-commerce on the Company's proprietary
interactive platforms; and the Media and Services Sector, which operates TV
Guide Magazine, TV Guide Channel, TVG Network, SkyMall catalog sales,
Superstar/Netlink Group and other non-interactive platforms and media
properties. Segment information reported in prior years has been reclassified
to conform with the current year presentation.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-46
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(14) Segment and Geographical Information (continued)
The Company's reportable segments are strategic business units that offer
different products and services and compete in different industries. Due to
purchase accounting, the results of operations for the year ended December 31,
2001 and the nine months ended December 31, 2000, reflect significant increases
in depreciation and amortization of goodwill and other intangible assets.
Accordingly, the Company's chief operating decision maker uses EBITDA
(operating income before stock compensation expense, depreciation and
amortization, impairment of goodwill and nonrecurring expenses) to evaluate the
performance of the three segments. Inter-segment eliminations consist of media
and sales commissions reported as revenues by the Media and Services Sector and
expenses by the Interactive Program Sector amounting to $10.0 million and
$991,000 in the year ended December 31, 2001 and the nine months ended December
31, 2000, respectively. The Company accounts for inter-segment sales as if the
sales were made to third parties at market prices. Assets of the reportable
segments are not relevant for management of the businesses.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-47
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(14) Segment and Geographical Information (continued)
Segment information for the year ended December 31, 2001, the nine months
ended December 31, 2000 and the year ended March 31, 2000 is as follows (in
thousands):
Restated Restated
Restated Nine months Year
Year ended ended ended
December 31, December 31, March 31,
2001(1) 2000 (1) 2000
------------ ------------ ---------
Technology and Licensing Sector:
Revenues............................................. $ 267,727 $ 160,626 $215,264
Expenses (2)......................................... 97,781 65,526 70,728
---------- --------- --------
EBITDA (3)........................................... $ 169,946 $ 95,100 $144,536
========== ========= ========
Interactive Platform Sector:
Revenues............................................. $ 78,704 $ 20,068 $ 3,641
Expenses (2)......................................... 120,368 47,872 27,859
---------- --------- --------
EBITDA (3)........................................... $ (41,664) $ (27,804) $(24,218)
========== ========= ========
Media and Services Sector:
Revenues............................................. $ 952,452 $ 514,907 $ 10,306
Expenses (2)......................................... 702,750 376,532 10,169
---------- --------- --------
EBITDA (3)........................................... $ 249,702 $ 138,375 $ 137
========== ========= ========
Consolidated (after eliminations)
Revenues............................................. $1,288,918 $ 694,610 $229,211
Expenses (2)......................................... 910,934 488,939 108,756
---------- --------- --------
EBITDA (3)........................................... 377,984 205,671 120,455
Stock compensation...................................... (44,729) (18,294) --
Depreciation and amortization........................... (942,060) (443,312) (5,863)
Impairment of goodwill.................................. (10,800) -- --
Nonrecurring expenses................................... -- -- (15,895)
Interest expense........................................ (27,298) (24,783) --
Other (expense) income, net............................. (119,126) 15,021 13,688
---------- --------- --------
(Loss) income before income taxes and extraordinary item $ (766,029) $(265,697) $112,385
========== ========= ========
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-48
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(14) Segment and Geographical Information (continued)
- --------
(1) Effective July 18, 2001 and July 12, 2000, the Company's consolidated
operating results include the operating results of SkyMall and TV Guide,
respectively. SkyMall and TV Guide were acquired in transactions accounted
for as purchases.
(2) Expenses means operating expenses, excluding stock compensation,
depreciation and amortization, impairment of goodwill and nonrecurring
expenses.
(3) EBITDA means operating income before noncash stock compensation expense,
depreciation and amortization, impairment of goodwill and nonrecurring
expenses, which consist of merger related costs incurred as a result of the
mergers with NuvoMedia, Inc. and SoftBook Press, Inc. in fiscal year 2000.
Due to purchase accounting related to the Company's merger with TV Guide on
July 12, 2000, the results of operations for the year ended December 31,
2001 and the nine months ended December 31, 2000, reflect significant
increases in depreciation and amortization of goodwill and other intangible
assets. Accordingly, the Company's business sectors are measured based on
EBITDA. EBITDA is presented supplementally as the Company believes it is a
standard measure commonly reported and widely used by analysts, investors
and others associated with its industry. However, EBITDA does not take into
account substantial costs of doing business, such as income taxes and
interest expense. While many in the financial community consider EBITDA to
be an important measure of comparative operating performance, it should be
considered in addition to, but not as a substitute for, operating income,
net income, cash flow provided by operating activities and other measures
of financial performance prepared in accordance with accounting principles
generally accepted in the United States of America that are presented in
the financial statements included in this report. Additionally, the
Company's calculation of EBITDA may be different than the calculation used
by other companies and, therefore, comparability may be affected.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-49
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(14) Segment and Geographical Information (continued)
A summary of the Company's revenues, operating income (loss) and
identifiable assets by geographic area is as follows (in thousands):
Restated Restated
Restated Nine months Year
Year ended ended ended
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ---------
Revenues:
United States............ $1,222,133 $ 574,430 $132,007
Foreign (1).............. 66,785 120,180 97,204
---------- --------- --------
Total................ $1,288,918 $ 694,610 $229,211
========== ========= ========
Operating income (loss) (2):
United States............ $ (646,929) $(358,646) $ 29,840
Foreign.................. 27,324 102,711 68,857
---------- --------- --------
Total................ $ (619,605) $(255,935) $ 98,697
========== ========= ========
Restated
-----------------------------------
December 31, December 31, March 31,
2001 2000 2000
------------ ------------ ---------
Identifiable assets:
United States.... $9,380,356 $10,613,052 $424,378
Foreign (3)...... 192,672 84,066 30,565
---------- ----------- --------
Total........ $9,573,028 $10,697,118 $454,943
========== =========== ========
- --------
(1) Revenues and operating income included in foreign are principally earned by
entities in the British Virgin Islands.
(2) Operating income (loss) consists of total revenues less operating expenses
and does not include other (expense) income.
(3) Identifiable assets included in foreign are principally held by entities in
the British Virgin Islands.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-50
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(14) Segment and Geographical Information (continued)
No single customer accounted for more than 10% of total revenues for the
year ended December 31, 2001 or for the nine months ended December 31, 2000.
The Company had revenues attributed to individual customers in excess of 10% of
total revenues for the year ended March 31, 2000:
Restated
Year ended
March 31,
2000
----------
Customer A.......... 18%
Customer B.......... 12%
Customer C.......... 11%
(15) Quarterly Information (unaudited)
Quarter ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
--------- --------- ------------- ------------
(in thousands, except per share data)
2001 (Restated)
Revenues......................... $ 333,242 $ 308,394 $ 316,041 $ 331,241
Operating loss................... (146,965) (161,163) (150,083) (161,394)
Net loss......................... (135,362) (147,894) (140,251) (212,151)
Basic and diluted loss per share. $ (0.33) $ (0.36) $ (0.34) $ (0.51)
2000 (Restated) (1)
Revenues......................... $ 71,765 $ 55,807 $ 296,803 $ 342,000
Operating income (loss).......... 27,250 27,587 (134,752) (148,770)
Net income (loss)................ 19,621 24,259 (124,031) (136,355)
Basic earnings (loss) per share.. $ 0.09 $ 0.12 $ (0.32) $ (0.33)
Diluted earnings (loss) per share $ 0.08 $ 0.10 $ (0.32) $ (0.33)
- --------
(1) Reported results for the transition period from April 1, 2000 to December
31, 2000 did not include results for the three months ended March 31, 2000.
Effective July 18, 2001 and July 12, 2000, the Company's consolidated
operating results include the operating results of SkyMall and TV Guide,
respectively. SkyMall and TV Guide were acquired in transactions accounted for
as a purchases. See Note 3.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-51
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(15) Quarterly Information (unaudited) (continued)
Operating results for the fourth quarter of 2001 include $14.8 million of
additional unearned compensation amortization resulting from a senior executive
officer that separated from the Company, impairment of goodwill of $10.8
million and a $98.3 million write-down of certain of the Company's technology
investments and marketable securities.
(16) Subsequent Events (restated)
Management Restructuring
On August 14, 2002, the Company announced that News Corp., Dr. Henry Yuen,
Chief Executive Officer, and Elsie Leung, Chief Financial Officer, submitted a
joint proposal to the Company's Board of Directors to restructure the Company's
management and to settle disputes among the parties. The Board of Directors
formed a committee of independent directors to consider the proposal and to
make a recommendation to the Board concerning the proposal. The Special
Committee, with the assistance of its independent legal advisors, evaluated the
proposal. On November 7, 2002, the Board of Directors approved and the Company
executed definitive documentation related to this restructuring. Dr. Yuen
resigned as Chief Executive Officer of the Company. Dr. Yuen will continue as
Chairman of the Board in a non-executive capacity and, under a new five-year
employment agreement, will lead a business unit formed to pursue international
business development opportunities. In that role, Dr. Yuen will also strive to
enhance and improve the Company's interactive program guides and interactive
technologies. As part of the agreement, Dr. Yuen assigned to the Company all
intellectual property relating to the Company's business that he has developed
and develops in the future in his new role. In addition, he has granted the
Company the right of first refusal to certain future inventions related to
interactive television and interactive programming guides for a period of time.
Jeff Shell has been named Chief Executive Officer succeeding Dr. Yuen.
Additionally, the Company appointed Paul Haggerty as Acting Chief Financial
Officer. Mr. Haggerty, currently Executive Vice President for Finance at News
Corp., which owns approximately 42 percent of the outstanding stock of the
Company, succeeds Elsie Leung. Ms. Leung will remain as a member of the Board
and, under a new three-year agreement, will work with Dr. Yuen to pursue
international opportunities for the Company. The Company will be conducting a
search for a permanent Chief Financial Officer.
Dr. Yuen will receive approximately $22 million and Ms. Leung approximately
$7 million as termination payments for their existing contracts. The cash
payable to Dr. Yuen and Ms. Leung under this settlement, as well as other
accrued but unpaid amounts due under their employment agreements totaling $8.0
million, will be held by the Company in a segregated account for up to six
months pending possible deposit of all or a portion of such cash into an escrow
account pursuant to the Sarbanes-Oxley Act. In addition, approximately 20
million outstanding options held by Dr. Yuen and Ms. Leung were cancelled. The
Company currently intends to grant
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-52
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (restated) (continued)
Management Restructuring (continued)
Dr. Yuen and Ms. Leung approximately 8 million shares of restricted stock and
approximately 9 million new stock options in connection with their termination,
employment and other future agreements.
The Company expects to record a charge related to this settlement agreement
in the fourth quarter of 2002.
SEC Formal Investigation
On October 17, 2002, the U.S. Securities and Exchange Commission ("SEC")
issued a formal order of investigation to determine whether there have been
violations of the federal securities laws. The Company previously disclosed
that it has been in discussions with the SEC regarding the Company's recently
completed internal accounting review. By formalizing this previously informal
discussion, the SEC will have the ability to subpoena individuals and entities
in order to gather more information. The Company intends to continue to fully
cooperate with the SEC as it moves forward in its process.
Nasdaq Delisting Proceeding
On August 19, 2002, the Company received a Nasdaq Staff Determination that
its securities are subject to delisting from the Nasdaq National Market because
the Company failed to file its Form 10-Q for the quarter ended June 30, 2002 on
or before August 14, 2002. On November 8, 2002, the Nasdaq Listing
Qualifications Panel granted the Company's request for an exception to continue
its listing on the Nasdaq National Market based on the following conditions:
. On or before November 19, 2002, the Company must file with the SEC and
Nasdaq the Form 10-Q for the quarter ended September 30, 2002,
notwithstanding the absence of the requisite SAS 71 accountant review.
. On or before March 3, 2003, the Company must file with the SEC and Nasdaq
all necessary amended filings for fiscal 2000, 2001 and 2002, including
affirmative statements that the filings have been reviewed and/or audited
in accordance with SEC requirements.
. On or before March 31, 2003, the Company must file with the SEC and
Nasdaq the Form 10-K for the fiscal year ended December 31, 2002; and
. On or before June 30, 2003, the Company must solicit proxies and hold an
annual meeting for fiscal 2001.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-53
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (restated) (continued)
Nasdaq Delisting Proceeding (continued)
To fully comply with the terms of this exception, the Company must be able
to demonstrate compliance with all requirements for continued listing on the
Nasdaq National Market. The Nasdaq Panel also reserved its right to modify,
alter or extend the terms of this exception upon a review of the Company's
reported financial results.
Significant Patent Litigation Rulings
On June 21, 2002, an Administrative Law Judge issued a Final Initial
Determination ("ID") in a United States International Trade Commission ("ITC")
proceeding denying the Company's request for an exclusionary order to prevent
further importation of certain set-top boxes containing IPGs which the Company
believes infringe some of its patents. The ITC determined not to review this
decision on August 29, 2002. On October 25, 2002, the Company filed a notice of
appeal of the ITC determination to the United States Court of Appeals for the
Federal Circuit.
On July 2, 2002, the United States District Court for the Western District
of North Carolina in the legal proceeding SuperGuide Corporation v. DirecTV
Enterprises, Inc., et al. (the "SuperGuide case") ruled that certain of the
defendants' products did not infringe the SuperGuide Patents, and on July 25,
2002, the court dismissed all remaining claims in the case. The Company was a
third-party defendant in this matter and had joined in SuperGuide's
infringement allegations against one of the defendants, EchoStar. The Company
has filed a notice of appeal of this decision to the United States Court of
Appeals for the Federal Circuit.
The Company is a party to certain proceedings consolidated in the United
States District Court for the Northern District of Georgia by the Judicial
Panel on Multi-District Litigation against Scientific-Atlanta and Pioneer,
among other parties and involving several patents, as described in Note 12
(Legal Proceedings). On August 30, 2002, the Company received an order from
that Court finding that two of the patents involved in these cases were not
infringed by certain digital set-top box products produced by
Scientific-Atlanta and Pioneer. On November 4, 2002, the Court ruled that the
remaining Scientific-Atlanta and Pioneer products at issue in this proceeding
were not infringed by the two patents that were the subject of the August
30/th/ ruling. The Company intends to seek review of these decisions in the
most expedited manner possible.
The MDL proceedings also involve three patents which were involved in the
SuperGuide case. The non-infringement rulings on July 2, 2002 and July 25, 2002
were based in part on a previous ruling of that Court interpreting the scope of
the patents at issue. On October 25, 2002, the Georgia Court hearing the MDL
cases ruled that it was obligated to accept the North Carolina Court's ruling
on the scope of the patents at issue without
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-54
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (restated) (continued)
Significant Patent Litigation Rulings (continued)
deciding whether the underlying ruling was correct as a matter of law. The
Georgia Court has not ruled on Scientific-Altanta's infringement of these
patents under this interpretation.
The Company assessed the impact of these rulings on its assumptions and
estimates in applying its accounting policies as follows:
The Company's accounting policy with respect to patent prosecution and
litigation costs incurred to protect, strengthen and enforce the Company's
intellectual property rights is to defer such costs as intangible assets and to
amortize them using the straight-line method over the remaining lives of the
related patents. The Company reviewed the carrying value of capitalized patent
litigation costs as a result of the rulings in the MDL, ITC and SuperGuide
cases. Although the Company has filed appeals in the SuperGuide and ITC cases
and intends to seek review when possible in the MDL case, the Company concluded
that these rulings raised doubts as to whether certain capitalized patent
litigation costs could be reasonably considered to strengthen the value of the
patents. Accordingly, the Company recorded a write-down of $44.4 million to
capitalized patent litigation costs during the quarter ended June 30, 2002 and
will expense all of the future legal costs of the SuperGuide and ITC cases. On
the basis of the October 25, 2002 ruling in the MDL case, the Company will
write off approximately $9.5 million of litigation costs that were previously
capitalized as intangible assets in accordance with the Company's accounting
policy during the three months ended December 31, 2002.
Under the requirements of Statement 142, goodwill and indefinite-lived
intangible assets must be tested on an interim basis if events or circumstances
indicate that the estimated fair value of the assets has decreased below its
carrying value. Also, under the requirements of Statement 144, the Company is
required to record impairment losses on long-lived assets used in operations
when events and circumstances indicate that long-lived assets might be impaired
and the undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. In view of the above-mentioned
adverse ruling in the ITC proceeding and the additional fact that the Company
has experienced a sustained decline in its market capitalization (expressed as
its share price multiplied by the number of shares outstanding) during 2002,
from $11.5 billion at January 1, 2002 to $2.2 billion at June 30, 2002, the
Company performed an interim impairment analysis of its goodwill,
indefinite-lived intangible assets and certain finite-lived intangible assets
as of June 30, 2002, with the assistance of a third-party valuation expert.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-55
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Share Repurchase Program
In April 2002, the Company's Board of Directors authorized an extension of
its authorization granted in September 2001 to repurchase up to $300 million of
the Company's outstanding shares of common stock. The authorization permitted
the Company to purchase shares in the open market at prevailing prices, or in
privately negotiated transactions at then prevailing prices. The extension
expired on September 18, 2002. During the period subsequent to the date the
extension was authorized through June 30, 2002, the Company repurchased 6.9
million of its shares of its common stock for an aggregate price of $63.4
million.
Intangible Asset Impairment
The Company completed its transitional indefinite lived intangible asset
impairment tests during the three months ended March 31, 2002 and June 30, 2002
respectively. The Company recorded an impairment charge of $187.8 million, net
of tax, related to its indefinite-lived intangible assets and $5,115.5 million
related to goodwill resulting in a total transitional impairment charge of
$5,303.3 million, net of tax. The charge has been recorded as the cumulative
effect of an accounting change as of January 1, 2002.
Based on an interim impairment analysis under Statement 142, the Company
recorded pre-tax impairment charges to its goodwill and trademark of $22.8
million and $24.0 million, respectively, during 2002 as an operating expense.
Based on an impairment analysis under Statement 144, the Company recognized
a pre-tax impairment loss of $1,212.3 million during the quarter ended June 30,
2002, after it was determined that the carrying value of certain finite-lived
intangible assets exceeded their fair value.
Other Legal Proceedings
In addition to the significant patent rulings described above, there have
been certain other material developments in legal proceedings to which the
Company is a party:
On October 18, 1999, a former employee of ODS Technologies, L.P. ("ODS"),
now a majority owned subsidiary of the Company, filed a complaint against ODS
and TV Guide in a Florida federal court, which complaint was amended on
November 12, 1999, asserting causes of action for violations of certain federal
statutes governing pension plans and for equitable estoppel. The amended
complaint sought an unspecified amount of damages for benefits allegedly due to
the plaintiff under his employment agreement with ODS. On April 22, 2002, the
Court granted ODS and TV Guide summary judgment dismissing the case. The former
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-56
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
employee appealed the grant of summary judgment, but the appeal subsequently
was dismissed. The plaintiff has filed a motion for reinstatement and this case
is currently pending on appeal.
On January 18, 2000, the Company's StarSight subsidiary filed a patent
infringement action against TiVo Inc. ("TiVo") in the U.S. District Court for
the Northern District of California. The suit claims, among other matters, that
TiVo willfully infringed certain StarSight intellectual property by virtue of
TiVo's deployment, marketing, offers to sell and sale of personalized video
recorder devices containing an unlicensed IPG. StarSight is seeking an
injunction and monetary damages. On February 25, 2000, TiVo answered
StartSight's Complaint, and also filed counterclaims against the Company and
StarSight alleging, among others, that the Company has violated federal
antitrust law and the California unfair business practices act. In its
counterclaims, TiVo seeks, among other relief, damages and an injunction. On
August 5, 2002, the Court entered a stipulation at the parties' request to stay
the proceeding pending resolution of the investigation before the ITC,
described above, and the Court has accepted that agreement. After the
resolution of any and all appeals stemming from the ITC investigation
(including any appeal to the United States Court of Appeals for the Federal
Circuit), we expect the Court will be notified of this fact and expect the case
to be re-activated at that point.
During July and August 2000. TV Guide was served with more than 20 class
action complaints filed primarily in the U.S. District Court for the Southern
District of New York on behalf of magazine subscribers. These complaints, which
have been consolidated into a single action, allege that TV Guide, the Magazine
Publishers Association ("MPA"), and 12 other publishers of consumer magazines
have violated federal antitrust laws by conspiring to limit the discounting of
magazine subscription prices by means of rules adopted by the MPA and the Audit
Bureau of Circulation. The plaintiffs seek injunctive relief, unspecified
damages (trebled), and attorneys' fees and costs. Plaintiffs filed a motion for
partial summary judgment. After oral argument was heard on January 10, 2001,
the parties entered into settlement discussions. Settlement negotiations
continued over the next several months and in April 2002, the defendants
submitted final settlement documents to plaintiffs for their approval.
Subsequently, the parties signed a settlement agreement, and on July 3, 2002,
plaintiffs filed a motion for preliminary approval of the settlement. On August
29, 2002, the court held a hearing at which the pending motion was discussed.
The Court entered an order on September 20, 2002, granting the motion for
preliminary approval.
On November 17, 2000, Pioneer Digital Technologies, Inc. filed suit against
the Company and various of its subsidiaries in Los Angeles County Superior
Court. On January 12, 2001, Pioneer Digital Technologies filed its first
amended complaint which claims, among other matters, that the Company and
certain of its subsidiaries have violated state antitrust and unfair
competition laws. Pioneer Digital Technologies is seeking damages and
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-57
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
injunctive relief against the Company. The parties are in pretrial proceedings.
In May 2002, the Court set trial for September 2003.
On December 29, 2000, Gemstar International Group Limited., Barnes & Noble,
Inc. and Thomson Consumer Electronics were named as defendants in an action for
patent infringement by Jennifer Landau, an individual, that relates to e-book
technology. The Company was served with this action in May 2001. This action,
captioned Jennifer Landau v. Barnes & Noble, et al., USDC Case No. C-00-593-B,
was pending in the U.S. District Court for the District of New Hampshire. In
May 2002, Ms. Landau voluntarily dismissed this action with prejudice, and
there are no longer any claims pending against the Company or any other parties
to this litigation.
On November 2, 2001, Thomson multimedia, Inc. ("Thomson") sought leave to
add the Company and certain subsidiaries into a case captioned Pegasus
Development Corporation and Personalized Media Communications, L.L.C. v.
DirecTV, Inc., Hughes Electronics Corporation, Thomson Consumer Electronics,
Inc. and Philips Electronics North America Corporation; Thomson multimedia,
Inc. v. Pegasus Development Corporation, Personalized Media Communications,
L.L.C. TVG-PMC, Inc., StarSight Telecast, Inc. and Gemstar-TV Guide
International, Inc., United States District Court for the District of Delaware,
Case No. 00-1020 (GMS). At that time, Thomson asserted a declaratory judgment
claim against the Gemstar parties seeking a declaration of noninfringement and
invalidity or certain patents as to which the Company is a licensee. In
addition to its claim for declaratory relief (discussed above), Thomson has now
also added a claim for antitrust violations under federal and state law. On
April 22, 2002, Thomson also filed a tag-along notice with the Judicial Panel
for Multi-District Litigation (the "MDL Panel") requesting that this entire
action be transferred to Georgia for coordinated pretrial proceedings with the
MDL proceedings discussed in the Company's Form 10-K for the period ended
December 31, 2001. On June 3, 2002, the MDL Panel issued a Conditional Transfer
Order and Simultaneous Separation and Remand of Certain Claims conditionally
transferring Thomson's antitrust claims to Georgia, but separating and
remanding the balance of the claims in this case to Delaware. In response,
Thomson filed a motion with the MDL Panel to transfer the entire case to
Georgia. On October 16, 2002, the MDL Panel issued an Order of Transfer and
Simultaneous Separation and Remand of Certain Claims in which it denied
Thomson's motion to transfer the entire case to Georgia. In so ruling, the MDL
Panel adopted its decision in the June 3, 2002 Conditional Transfer Order and
transferred Thomson's antitrust claims to Georgia, but separated and remanded
the balance of the claims in the case to Delaware. Now that the MDL Panel has
issued its final order, the Company understands that the Delaware litigation
will be reactivated, and Thomson's antitrust claims will be transferred and
coordinated for pretrial purposes with the Georgia MDL Proceedings.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-58
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
On November 30, 2001, Thomson initiated an arbitration with the American
Arbitration Association against the Company. The Statement of Claims filed by
Thomson alleges that the Company has breached certain obligations under a group
of agreements signed by the parties as of December 31, 1999 relating to a joint
venture between the parties for revenue sharing of advertising on electronic
programming guides. On January 7, 2002, the Company filed an Answering
Statement and Counterclaim denying all allegations of the claims filed by
Thomson and asserting counterclaims against Thomson and Thomson multimedia,
S.A. ("Thomson S.A.") alleging, among other things, that Thomson S.A. had
breached certain of its obligations under one of the agreements signed by the
parties as of December 31, 1999 relating to the introduction of electronic
programming guides in Europe. In May 2002, the Company settled this dispute and
entered into a binding Letter of Intent with Thomson, and the arbitration has
been stayed pending the execution of a definitive agreement.
In April and May 2002, the Company and its principal executive officers and
directors were served with a number of complaints, filed in the United States
District Court for the Central District of California, alleging violations of
the Securities Exchange Act of 1934 (the "1934 Act") and the Securities Act of
1933 (the "1933 Act"). Also named in several of the complaints is The News
Corporation Limited ("News Corp."), a shareholder of the Company. The
complaints name some or all of the same parties as defendants, and purport to
state claims on behalf of all persons who purchased the Company's common stock
during various periods, the broadest of which is August 11, 1999 through April
4, 2002. More particularly, the alleged claims are brought under Sections 10(b)
and 20(a) of the 1934 Act, Section 11 of the 1933 Act and SEC Rule 10b-5. The
essence of the allegations is that the defendants allegedly intentionally
failed to properly account for revenue accrued from Scientific-Atlanta; failed
to properly account for a non-monetary transaction, pursuant to which
intellectual property rights were obtained, in exchange for cash and
advertising credits; and failed to properly record the fair value of technology
investments and marketable securities acquired in connection with the Company's
acquisition of TV Guide, Inc. Plaintiffs allege that this had the effect of
materially overstating the Company's reported financial results. Pursuant to
the parties' stipulation, the District Court has consolidated all of the
lawsuits (and any subsequently filed lawsuits) into one case known as In re
Gemstar-TV Guide International Securities Litigation, Master File No. 02-2775,
NM (PLAx) (C.D. Cal.) Several groups of plaintiffs and their counsel filed
motions to be appointed lead plaintiff and lead plaintiff's counsel. Pursuant
to an amended order dated August 9, 2002, the Court appointed the Teachers
Retirement System of Louisiana and the General Retirement System of the City of
Detroit as co-lead plaintiffs, and appointed Bernstein, Litowitz, Berger &
Grossman, L.L.P., as lead plaintiffs' counsel. Plaintiff Georgica Advisors has
requested that the court reconsider that decision and appoint it as lead
plaintiff. The motion is scheduled to be heard on November 18, 2002. Lead
plaintiffs are expected to file their consolidated complaint on or before
December 12, 2002. Defendants' response to the consolidated complaint is
expected to be due on or before February 14, 2003. In addition, an Oklahoma
limited partnership filed a lawsuit
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-59
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
in the United States District Court for the Northern District of Oklahoma on
October 7, 2002 against some of the same defendants, including the Company,
based on the same core allegations and purported causes of action alleged in
the consolidated class action. Also, the Company learned on or about November
1, 2002 that, based on these same core allegations, a separate lawsuit was
filed in the federal district court for the Central District of California
against the Company and some of the same defendants. The lawsuit alleges state
law based derivative claims, including those based on various breaches of
fiduciary duty. The Company believes the allegations are without merit and
intends to defend these actions vigorously.
In April and May 2002, the Company, along with several of its principal
executive officers and directors, were also sued in four purported shareholder
derivative actions. Three of these actions were filed in the Superior Court of
the State of California for the County of Los Angeles and one action was filed
in the Court of Chancery of the State of Delaware, County of New Castle. These
purported derivative lawsuits allege various breaches of fiduciary duty and
violations of the California Corporations Code based upon the same general set
of alleged facts and circumstances as the federal shareholder suits. Pursuant
to the parties' stipulation, the California actions have been consolidated into
one case before a single judge. Plaintiffs are required to file their
consolidated amended complaint by late December 2002. On October 31, 2002, the
Company was served with another purported shareholder derivative action, this
one in the United States District Court for the Central District of California,
based upon the same general set of alleged facts and circumstances. The Company
believes the allegations are without merit and intends to defend the actions
vigorously.
On August 22, 2002, Scientific-Atlanta filed an adversary complaint in the
United States Bankruptcy Court for the Northern District of California. The
Complaint alleged that by seeking to acquire certain assets (including certain
patents) owned by DIVA Systems Corporation ("DIVA"), the Company would be in
violation of a federal antitrust statute, Clayton Act (S)7, 15 U.S.C. (S)18.
DIVA currently is a debtor-in-possession pursuant to Chapter 11 of the
bankruptcy code. Also on August 22, 2002, Scientific-Atlanta filed a tag along
notice with the MDL Panel, seeking to have its complaint concerning the
acquisition of DIVA assets transferred to the U.S. District Court for the
Northern District of Georgia, the Court overseeing the cases subject to the MDL
Transfer Order described above. On October 2, 2002, the Bankruptcy Court
dismissed Scientific-Atlanta's adversary complaint. Shortly thereafter,
Scientific-Atlanta notified the MDL Panel that the Bankruptcy Court had
dismissed its adversary complaint.
On September 6, 2002, TV Guide Distribution, Inc. ("TVGD"), together with
six other plaintiffs comprising national distributors of magazines, filed an
action entitled TV Guide Distribution, Inc. et al. v. Ronald E. Scherer et al.,
in the Court of Common Pleas, Franklin County, Ohio (Case No. 02CVH099891). The
complaint named
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-60
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
more than thirty defendants, made up of principals and shareholders of United
Magazine Company, Inc. ("Unimag") and their affiliates, regional wholesalers of
magazines that went out of business in September 1999, leaving more than $100
million of outstanding receivables due and owing to the national distributor
plaintiffs. The complaint alleges that defendants engaged in a course of
conduct that violated Ohio statutes prohibiting fraudulent conveyances and
other unlawful payments designed to hinder, delay or defraud TVGD and the other
plaintiffs, Unimag's creditors. An initial status conference has been scheduled
for November 21, 2002. See the Company's Form 10-Q for the quarter ended March
31, 2002, as amended, for a discussion of other ongoing litigation involving
Unimag and TVGD.
On September 25, 2002, the Company notified DIVA that it had elected not to
proceed with the purchase of DIVA's assets. In response, on September 30, 2002,
DIVA filed an adversary complaint against the Company for breach of contract
and other claims purportedly based upon the Company's decision not to acquire
DIVA's assets. After DIVA filed its complaint, at DIVA's request, the
Bankruptcy Court ordered an expedited trial on DIVA's claims against the
Company for breach of contract and specific performance. Trial of these claims
was scheduled to begin in late October 2002. However, on October 17, 2002, DIVA
withdrew its request for an expedited trial, and agreed to dismiss its specific
performance claim. On October 17, 2002, the Company responded to certain of
DIVA's claims denying liability to DIVA, including any liability purportedly
based upon the Company's decision to terminate the asset purchase agreement. At
the same time, the Company filed counterclaims against DIVA and
Scientific-Atlanta for declaratory relief relating to the Company's decision
not to purchase DIVA's assets. Now that the Bankruptcy Court has vacated the
expedited trial date, the parties are in pretrial proceedings. On November 1,
2002, DIVA filed a First Amended Complaint against the Company and certain of
its senior executives. This First Amended Complaint adds additional claims
purportedly based upon the DIVA purchase agreement, as well as the Company's
decision not to acquire DIVA's assets. The Company believes that DIVA's
allegations are without merit and intends to defend this action vigorously.
On November 6, 2002, Scientific-Atlanta, Inc. and PowerTV, Inc. ("S-A")
filed a counterclaim against the Company and certain of its subsidiaries in a
case captioned Personalized Media Communications, L.L.C. v. Scientific-Atlanta,
Inc. and PowerTV, Inc., United States District Court for the Northern District
of Georgia, Atlanta Division, Civil Action No. 02-CV-824 (CAP). At that time,
S-A asserted declaratory relief claims against the Gemstar parties seeking a
declaration of noninfringement, invalidity and unenforceability of certain
patents as to which the Company is a licensee. On November 6, 2002, S-A also
filed a motion with the MDL Panel to transfer this action to Delaware for
consolidation of pretrial proceedings with the Pegasus Development Corporation,
et al. v. DirecTV, Inc., et al. matter discussed above. The Company has not yet
been served with S-A's counterclaims or motion to transfer, and has therefore
not had the opportunity to fully evaluate this matter.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-61
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(16) Subsequent Events (continued)
Other Legal Proceedings (continued)
On November 7, 2002, the Company received a letter from the United States
Department of Justice ("DOJ"). The DOJ has indicated they believe that Gemstar
International Group Limited and TV Guide, Inc. engaged in unlawful coordination
of activities prior to their merger on July 12, 2000. The Company has reason to
believe that the DOJ may initiate an action against the Company under federal
antitrust laws in the near future. The DOJ has also indicated that it would be
willing to enter into negotiated agreement with the Company and has provided
the Company with a possible settlement structure, including the imposition of a
fine and certain other conditions and restrictions. The Company believes that
its conduct prior to the merger was lawful, but will evaluate whether there are
acceptable terms for a negotiated resolution in this matter.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-62
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and should not be relied upon.
- --------------------------------------------------------------------------------
GEMSTAR-TV GUIDE INTERNATIONAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance
at Charged Charged Balance
Beginning to to Other at End of
Description of Period Expense Accounts Deductions Period
- ----------- --------- ------- -------- ---------- ---------
Allowance for doubtful accounts:
Year ended December 31, 2001........ $26,646 $17,101 $ 3,614(1) $15,084 $32,277
Nine months ended December 31, 2000. 2,627 12,097 17,432(2) 5,510 26,646
Year ended March 31, 2000........... -- 2,627 -- -- 2,627
- --------
(1) Amount represents the allowance for doubtful accounts acquired as part of
the assets and liabilities acquired in the SkyMall Transaction.
(2) Amount represents the allowance for doubtful accounts acquired as part of
the assets and liabilities acquired in the TV Guide Transaction.
- --------------------------------------------------------------------------------
The information contained in the Unaudited Consolidated Financial Statements
included herein has not been audited or reviewed by an independent accounting
firm and there can be no assurance that at the conclusion of its audit the
Company's independent accounting firm will issue an opinion (unqualified or
otherwise) on the Unaudited Consolidated Financial Statements. The Company
recently engaged a new independent accounting firm to audit its Unaudited
Consolidated Financial Statements. The Company believes that it is likely that,
as a result of such accounting firm's audit of the Unaudited Consolidated
Financial Statements and the Company's ongoing review of its accounting
policies and the application of these policies to various types of
transactions, the Company will further restate the Unaudited Consolidated
Financial Statements. Such restatements may be material. Accordingly, the
information presented in or derived from the Unaudited Consolidated Financial
Statements contained in this report should not be relied upon.
F-63
EXHIBIT INDEX
Exhibit
Number Document Description
- ------ --------------------
2.1 Agreement and Plan of Merger dated as of October 4, 1999 among Gemstar International Group
Limited, G Acquisition Subsidiary Corp. and TV Guide, Inc., as amended on February 7, 2000
(Incorporated by reference to Gemstar's Form S-4 Registration Statement (333-96407), filed
February 8, 2000)
3.1 Certificate of Incorporation of Gemstar International Group Limited (Incorporated by reference to
Gemstar's Form S-4 Registration Statement (333-96407), filed February 8, 2000)
3.2 Amended and Restated Bylaws of Gemstar-TV Guide International, Inc. (Incorporated by reference
to Gemstar's Amendment No. 1 on Form 10-K/A, filed April 30, 2002)
4.1 Second Amended and Restated Rights Agreement, effective as of July 12, 2000, between Gemstar
and American Stock Transfer & Trust Company (Incorporated by reference to Gemstar's Form
8-K filed July 12, 2000).
10.1 Gemstar-TV Guide International, Inc. 1994 Stock Incentive Plan, as amended and restated (Formerly
the Gemstar International Group Limited 1994 Stock Incentive Plan; Composite Plan Document
Reflecting Stock Splits and Plan Amendments Through 2001) (Incorporated by reference to
Gemstar's Amendment No. 1 on Form 10-K/A, filed April 30, 2002)
10.2 TV Guide, Inc. Equity Incentive Plan (Incorporated by reference to Gemstar's Post Effective
Amendment No. 2 on Form S-8 to Form S-4 Registration Statement (333-96407), filed August 30,
2000)
10.3 Gemstar International Group Limited Deferred Compensation Plan, effective as of January 30, 2000.
(Incorporated by reference to Gemstar's Form 10-K for the year ended March 31, 2000)
10.4 Trust under the Deferred Compensation Plan (Rabbi Trust) of Gemstar International Group Limited,
effective as of January 30, 2000, by and between Gemstar International Group Limited and any
appointed Subsidiary and Merrill Lynch Trust Company of California. (Incorporated by reference
to Gemstar's Form 10-K for the year ended March 31, 2000)
10.5 SERP Deferred Compensation Plan (a continuation and restatement of the United Video
Management, Inc. and Affiliates Employers' SERP Deferred Compensation Plan); Trust under
SERP Deferred Compensation Plan dated September 29, 1995 (Incorporated by reference to Form
10-Q of TV Guide, Inc. for the quarter ended September 30, 1995)
10.6 Amended and Restated Employment Agreement, effective as of January 7, 1998, among Gemstar
International Group Limited, Gemstar Development Corporation and Henry C. Yuen (Incorporated
by reference to Gemstar's Form 10-K/A for the year ended March 31, 1998, filed November 17,
1998) (Certain information in this exhibit has been omitted pursuant to a request for Confidential
Treatment which was filed with the Securities and Exchange Commission)
10.7 Amendment No. 1 to Amended and Restated Employment Agreement, dated as of October 4, 1999,
by and among Gemstar International Group Limited, Gemstar Development Corporation and
Henry C. Yuen (Incorporated by reference to Gemstar's Form 8-K, filed February 8, 2000)
10.8 Amended and Restated Employment Agreement, dated as of March 31, 1998, among Gemstar
International Group Limited, Gemstar Development Corporation and Elsie Leung (Incorporated by
reference to Gemstar's Form 10-K/A for the year ended March 31, 1998, filed November 17,
1998) (Certain information in this exhibit has been omitted pursuant to a request for Confidential
Treatment which was filed with the Securities and Exchange Commission)
10.9 Amendment to Amended and Restated Employment Agreement, dated as of April 13, 2000, among
Gemstar-TV Guide International, Inc., Gemstar Development Corporation and Elsie Leung
(Incorporated by reference to Gemstar's Amendment No. 1 to Form 10-K/A, filed April 30, 2002)
II-1
10.10 Employment Agreement, entered into as of January 3, 2001, between Gemstar Development
Corporation and Jonathan Orlick (Incorporated by reference to Gemstar's Amendment No. 1 on
Form 10-K, filed April 30, 2002)
10.11 Employment Agreement, entered into as of March 1, 1999, between TV Guide, Inc. and Peter C.
Boylan III (Incorporated by reference to Gemstar's Form 8-K, filed February 8, 2000)
10.12 Separation and Consulting Agreement, entered into as of March 4, 2002, between Gemstar-TV Guide
International, Inc. and Peter C. Boylan III (Incorporated by reference to Gemstar's Amendment No.
1 on Form 10-K/A, filed April 30, 2002)
10.13 Employment Agreement, dated August 1995, between Gemstar International Group Limited and
Thomas L.H. Lau (Incorporated by reference to Gemstar's Form F-1 Registration Statement (33-
79016), which was declared effective on October 10, 1995)
10.14 Separation and Consulting Agreement, entered into as of November 27, 2001, between Gemstar-TV
Guide International, Inc. and Joachim Kiener (Incorporated by reference to Gemstar's Amendment
No. 1 on Form 10-K/A, filed April 30, 2002)
10.15 Stockholders Agreement, dated as of October 4, 1999, by and among The News Corporation Limited,
a South Australia, Australia corporation, Liberty Media Corporation, a Delaware corporation, Henry
C. Yuen and Gemstar International Group Limited, a British Virgin Islands corporation
(Incorporated by reference to Gemstar's Form 8-K, filed February 8, 2000)
10.16 Facility A Loan Agreement for $300,000,000 Revolving Credit Facility among TV Guide, Inc. and
various Financial Institutions, dated as of March 1, 1999 (Incorporated by reference to Form 10-Q
of TV Guide, Inc. for the quarter ended March 31, 1999)
10.17 First Amendment and Waiver to Facility A Loan Agreement among TV Guide, Inc. and various
Financial Institutions, dated as of February 25, 2000 (Incorporated by reference to Form 10-K of TV
Guide, Inc. for the year ended December 31, 1999)
10.18 Second Amendment to Facility A Loan Agreement among TV Guide, Inc. and various Financial
Institutions, dated as of February 9, 2001 (Incorporated by reference to Form 10-K of TV Guide,
Inc. for the year ended December 31, 2000)
10.19 Facility B Loan Agreement for $300,000,000 364-day Credit Facility among TV Guide, Inc. and
various Financial Institutions, dated as of March 1, 1999 (Incorporated by reference to Form 10-Q
of TV Guide, Inc. for the quarter ended March 31, 1999)
10.20 First Amendment and Waiver to Facility B Loan Agreement among TV Guide, Inc. and various
Financial Institutions, dated as of February 25, 2000 (Incorporated by reference to Form 10-K of TV
Guide, Inc. for the year ended December 31, 1999)
10.21 Second Amendment to Facility B Loan Agreement among TV Guide, Inc. and various Financial
Institutions, dated as of February 9, 2001 (Incorporated by reference to Form 10-K of TV Guide,
Inc. for the year ended December 31, 2000)
10.22 Lock-Up Agreement between Gemstar and Robert M. Worsley, Christi M. Worsley and The Robert
Merrill Worsley Family Revocable Trust, dated July 28, 1998 (Incorporated by reference to
Gemstar's Form S-4 Registration Statement (333-62986), filed June 14, 2001)
10.23 Amendment No. 2 to the Amended and Restated Employment Agreement, dated as of May 4, 2001,
between the Company and Henry C. Yuen.
21.1 List of Subsidiaries*
- --------
* Previously filed on April 1, 2002 with Gemstar's Form 10-K for the year
ended December 31, 2001.
II-2